Mutual funds offer an easy solution to the challenging problem of saving tax. They provide an opportunity to not just save tax but also generate long term wealth.
This article helps you learn everything that you need to know about the best tax saving mutual funds in India and a step by step process to invest. Here you will find benefits, a list of the best ELSS mutual Funds (tax saving mutual funds), and a comparison with other popular tax saving options.
Tax Saving Mutual Funds & ELSS
Both the terms - tax saving mutual fund and Equity Linked Savings Scheme (ELSS) - are used interchangeably. ELSS is an open-ended Equity Mutual Fund.
Tax saving mutual fund allows an individual or HUF to invest up to Rs. 1.5 Lakhs under Sec 80C of the Indian Income Tax Act.
ELSS doesn't just help you save tax but also gives you an opportunity to grow long term wealth as they are equity-based instruments which have the potential to generate inflation-beating returns.
Let us look at various benefits of ELSS
Benefits of Tax Saving Mutual Funds (ELSS)
1. Easy Tax Savings Benefit with ELSS Mutual funds
The two features of tax-saving ELSS mutual funds schemes which attract new as well as experienced investors are that
- Being equity-based, it offers a long term wealth creation opportunity
- Gains up to Rs. 1 Lakh are exempted from tax. Earnings over Rs. 1 Lakhs are taxed at a flat rate of 10%.
2. Higher Returns on Investment
Investments in ELSS are made in the equity markets, hence you earn a higher post-tax return when compared to other 80C investment options which invest in fixed income like PPF, and NPS.
Historically, ELSS has generated approximately around 12% or more over a period of 5-10 years. This is much more than the 8% returns from PPF and NSC.
Therefore, apart from saving you taxes, the funds also generate higher gains, making them an ideal investment option if you are willing to invest for a long term duration.
Check out comparison between ELSS vs PPF
3. Flexibility in Payment
You can invest in ELSS as per your needs. Choose between SIP or lump sum investment, whatever is easier for you.
You can continue investing even after 3 years of lock-in period and even invest more than the 80C limit as there is no maximum limit.
4. Shorter Lock-in Period
When compared to other tax saving investment options, ELSS funds have a lower lock-in period of only 3 years. This is not the case for PPF, NPS, NSC or EPF, all of which require a minimum of 5 years lock-in period.
The fund invests 94% of the corpus in equity instruments and the remaining 6% other instruments.5. No Prior Experience Required
As a tax saver and an investor, you are not required to do research or have extensive knowledge of the markets in order to invest in tax saving mutual funds.
ELSS funds are run by experienced fund managers who are qualified experts who manage funds on your behalf.
Best Tax Saving Mutual Funds in India (ELSS)
1. Motilal Oswal Long Term Equity Fund (G)
Motilal Oswal Long Term Equity Fund’s scheme objective is to generate long-term capital appreciation from a diversified portfolio of predominantly equity and equity-related instruments.
The fund invests 94% of the corpus in equity instruments and the remaining 6% other instruments.
The salient features of the Motilal Oswal Long Term Equity Fund (Growth) (as on 1st August 2019) are:
|Features||Motilal Oswal Long Term Equity Fund (Growth)|
|Managed By||Motilal Oswal Asset Management Company Limited|
|AUM||Rs. 1339.03 Crores|
2. DSP Tax Saver Fund (G)
DSP Tax Saver Fund’s scheme objective is to generate medium to long-term capital appreciation from a diversified portfolio that is substantially constituted of equity and equity-related securities of corporates.
The fund invests 95% of the corpus in equity instruments and the remaining 5% other instruments.
The salient features of the DSP Tax Saver Fund (Growth) (as on 1st August 2019) are:
|Features||DSP Tax Saver Fund (Growth)|
|Managed By||DSP Investment Managers Private Limited|
|AUM||Rs. 5413.31 Crores|
Comparison with Other Tax Saving Options
Below is the comparison table of various commonly used tax saving options
|Options||Tax on Returns||Lock-in Period||Risk||Historical Returns|
|PPF||Tax-Free||15 Years||Low||7.8% to 8%|
|NPS||Partially tax-free||Partial Withdrawal after 60 years||Medium||8% to 10%|
|Tax Saving FD||Taxable||5 Years||Low||6.5% to 7.5%|
|ULIPs||Tax-Free||5 Years||High||10% |
|ELSS||10% taxable when profit exceeds 1 Lakh in a year||3 Years||High||10%-12%|
You can see why ELSS is a better choice for your tax planning. Not only will you have a lower lock-in period of 3 years but you also generate higher returns on your investments.
Who Should Invest in Tax Saving Mutual Funds
Now you need to understand risk in the context of your goals. Tax saving mutual funds are subjected to market fluctuations due to their exposure to equities and the volatility associated with it is high.
Following are the ways through which you can invest in ELSS
- Using an online mutual fund investment platform
- Directly online through AMC website
- Using your Demat account
- Through the help of registrars like Karvy and CAMS
- Offline through your agent
The step by step process for investing in tax saving mutual funds through Scripbox is as under
Step 1. Visit Scripbox and Signup
First-time users need to sign up by visiting our website to avail the paperless investment process.
Step 2. Create New Plan (Tax Saver Plan)
Next, you will land to the dashboard page where you will be asked to select the purpose. For tax savings, you need to pick the Tax Saver Plan.
Step 3. Get Plan Details
Here you will find details such as approximate returns which you can generate. Later you can find the graph on expected returns based on historical data.
Further, you will find a pre-selected list of two of the best performing tax saving mutual funds for you to invest from the list of 145 ELSS funds available in India.
You can click on the link to view the detailed scheme information of the two funds.
Step 4. Proceed to Invest
Click on Next to proceed with your investment. Here you will have the option to pick between a lump sum or systematic investment plan (SIP) method of investment and the amount of your choice (but more than Rs. 5000 when investing for the first time).
Step 5. Investor Information
At the last step, you need to provide information like date of birth to assess your age, gender, investor type (resident, NRI or PIO) and the mobile number.
Next, you will need to provide PAN details and to add bank account details for transacting. The account will be used for investment and crediting the redemption amount by the mutual fund houses directly to your specified bank account.
The information required is not additional but the minimum which is required for making mutual fund investments irrespective of any of the methods you adopt.
You can pick ELSS for its lower lock-in period, higher returns and an advantage to combine it with other tax savings options. With so many positives, tax-saving ELSS mutual funds definitely score high from a tax planning perspective.
In case of any doubts or questions, please feel free to ask in the comments section below, we will try and respond as early as possible.