Do Mutual Fund Investments Provide Tax Benefits?

Equity Linked Saving Schemes are a great way to save tax. They offer a shorter lock-in period, a higher potential return and a lower cost than other products that can be used to save taxes. These equity mutual funds are great options for young professionals looking to save taxes.

You must be looking for ways to lower your tax liability as the tax season approaches. This could include buying tax-saving medical insurance or topping up your PPF account. Are you looking to save a few thousand dollars on tax? Or would you rather earn a handsome return while you invest your hard-earned cash in these avenues? Mutual funds offer tax saving mutual funds, or Equity Linked Saving Schemes. These mutual funds are a great option for young salaried individuals who aren’t looking to retire in the next 5-10 year. These funds can be eligible for tax relief under Section 80C (Indian IT Act). These funds can be invested in equities just like any equity mutual money. They also come with a lock-in period for three years. If you are in the 30% income tax bracket, and you invest Rs.1.5 million in these funds, you will get a tax benefit in the amount of Rs.45,000 per year. Your 1.5 lakhs is also earning you a handsome two-digit return which is more than you would get from a fixed deposit account or a PPF account.

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These funds are locked in for three years so you won’t be tempted sell your investments if the market turmoil is affecting your peace of mind. This allows you to avoid the capital gains tax, which many investors face when they jump on the equity bandwagon in an attempt to make quick money. They don’t realize the long-term benefits of investing. You can enjoy compounding.

Investors don’t realize the impact tax on mutual fund, especially in light of STT (Securities Transaction Tax), and short-term capital gain tax that can lower the portfolio return. Hence, the lock-in period for ELSS funds can be a blessing for such investors. ELSS funds are tax-saving funds that help you save taxes annually. They also make a great option for retail investors who want equity investing but have a low risk appetite. These funds can be used to help investors avoid the volatility of equity mutual funds. These funds have a three-year lock-in period. However, it is recommended to invest in these funds for at most five years to reap the long-term benefits of equity investing. You can also save taxes over the five-year period.

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Considering the three distinct benefits ELSS mutual fund offers, namely saving taxes, higher return, and a lock-in period of 3 years that is lower than other tax saving products such as PPFs or long-term FDs (and a potential for lower taxes), investing in ELSS funds via SIP would be a smart decision.