Why Should You Invest in Tax Saving Mutual Funds?

The IT Act, 1961 Section 80C provides income tax exemption for mutual funds that are tax saving. They have the double purpose of providing tax savings up to Rs.45,000 per year, and the potential for higher returns than other tax saving schemes under Sec 80C. Investing in ELSS funds is a better way to save tax because they have a lower lock-in period of 3 years.

Every salaried worker is searching for ways to reduce their tax burden by investing in options that offer tax exemptions under Section 80C (IT Act) come March. Not only are salaried workers looking for ways to save tax, but freelancers, consultants and business owners too are searching for chartered accountants and financial advisors to help them reduce their tax liabilities. A person can claim tax exemption of up to Rs. 80C under the Income Tax Act if they earn an income from any source. 1.5 lakhs for a financial year.

To determine if they have reached 1.5 lakhs, people start to calculate the investment made via life insurance premium, EPF contributions and home loan principal. They look for lucrative investments that not only save them tax but also provide good returns. People often put the remaining amount in PPFs due to lack of time or knowledge. This allows them to reach their maximum tax exemption of 1.5 lakhs. Others simply open a 5-year FD to accomplish this goal, which is also exempted from tax under Sec 80C. Are you one of these people who rush to make investment decisions that could prove sub-optimal?

Let’s take a look at ways you can save taxes and earn a good rate of return by selecting an option that is well-known but not widely known. You can also choose to invest in a regular basis to save taxes. You can also choose to invest tax-saving mutual funds. Also known as ELS funds.

Let’s first understand what Equity Linked Savings (ELSS) schemes are. These are tax-saving products that mutual funds offer. An ELSS, a diversified equity mutual funds, has three distinct advantages. It can help you save tax, just like other tax-saving instruments under Sec 80C. It creates wealth in a way that is unmatched by any other option under 80C. It has a 3 year lock-in period, which is lower than other tax saving options. You should consider options with lower lock-in periods and higher potential returns, as all tax savings options come with a lock-in. To receive maximum tax benefits under section 1980C of the Income Tax Act 1961, you can invest as much as Rs.1.5 lakh annually. The tax savings may be slightly higher if you fall within the 30% tax bracket.

ELSS mutual funds are a good place to start investing in equities. Mutual funds can help reduce the risk of investing in equities. They invest in a diverse basket of securities and are managed professionally by fund managers. Secondly, if an ELSS is chosen through SIP, your risk would be spread across different time periods. You won’t be under stress at the end the year to finish your investments under Sec. 80C. SIP (Systematic Investor Plans) allow you to invest a smaller amount at regular intervals. For example, you can make an investment of 1.5 million in March without being under financial pressure. You can also choose to invest for a longer period than the three year lock-in period. As equities tend to be more volatile in the short-term, it is recommended that you invest for longer periods than five years. Although ELSS has a shorter lock-in period (three years), they can offer higher returns and are exempt from tax after lock-in. Traditional options may have a longer lock in period and could be affected by falling interest rates.

You can make an investment via a SIP at Rs. You can easily reach Rs.60,000 by investing Rs. 5,000 per month. This is in addition to the Rs. This investment will cover 1.5 lakhs as per Sec 80C. It is likely that you would have other investments such as a life insurance policy, home loan principal, or EPFs to pay the Sec 80C balance. You can diversify your Sec 80C portfolio by investing in Equity linked mutual funds that are tax saving and tax efficient, as most of the investments covered by Sec 80C fall under the non-equity assets class. Non-equity assets include EPFs and PPFs as well as 5 year bank FDs, NSCs, and home loan principal. There is a good reason to add ELSS investments to your portfolio of tax-saving investments. You will create wealth when you invest via SIP. The power of compounding starts to increase your mutual fund returns over the long-term. You will get more benefits from a tax savings scheme the longer you keep it invested.