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Investing in mutual funds has become very popular lately. These mutual fund investments offer investors a chance of making investments in various financial instruments. The benefit of mutual fund investments is that they provide better returns when compared to traditional modes of investment. Investing in a mutual fund also provides tax benefits. However, it should be a tax saving mutual fund where an individual can get tax benefits under section 80C of the Indian Income Tax Act,1961.

What are tax saving mutual funds?

Tax saving investments are those which come with tax-saving benefits. They are also known as Equity Linked Savings Schemes ELSS or tax saving funds or tax planning mutual funds. The investment in ELSS funds or tax saving funds in India is eligible for tax deduction under 80C of Indian Income Tax Act,1961. Investors can claim deduction up to 1.5 lakh under this section.

The tax saving mutual fund invests in equity or equity-related financial instruments. They come with a mandatory lock-in period of 3 years. It means that investment cannot be withdrawn until the maturity period. Since the majority of the corpus of these schemes invest in equity, the investors should stay invested for a longer horizon. Investments in ELSS funds or tax saving funds can be made through SIP or lumpsum. If the investment is made through SIP, then each SIP has a lock-in for three years.

One can estimate their returns using Scripbox’s SIP calculator or lump sum calculator. Both SIP calculator and lumpsum calculator are available online and free to use.

There are two types of options under tax saving mutual funds in India. They are dividend options and growth options. In dividend options, the investors get an additional income in the form of a dividend in their hands. The respective fund house declares the dividend as per their time and availability of distributable surplus. The dividends received are not subjected to tax or any lock-in. They can be withdrawn or reinvested in the same or different scheme. In growth option, it generates a long term capital appreciation for investors. The investment amount can be redeemed at the end of the maturity period.

Benefits of investing in tax saving mutual funds

Tax saving mutual funds come with several benefits to the investors. Some of them are

Tax saving

Investments in ELSS mutual funds or  tax saving mutual funds provides a tax benefit of 1.5lakhs under section 80C of Income Tax Act. It Comes under the EEE taxation regime where the investment amount, wealth accumulated and the returns earned are tax exempted. As it invests in diversified equity related instruments, it gives better returns. It helps an investor to save tax  by claiming a tax deduction.


In the long run, these tax saver funds can deliver potential returns as they essentially invest in the equity market. Although risky, it gives better growth when compared to the other traditional tax saving investments  like fixed deposit, national pension scheme, public provident fund, etc.

Low Lock-in Period

Tax saving mutual fund, i.e. ELSS mutual fund is an equity scheme which comes with the lowest lock-in period. Other tax saving options have a more extended lock-in period than tax saving schemes. This embeds an excellent habit to stay invested for a more extended period.

Capital appreciation

The growth-oriented option in a Equity Linked Savings Schemes ELSS fund helps an investor to accumulate a fair amount at the end of the maturity period. Staying invested for a long duration helps the investor to take advantage of the market fluctuations and build a sufficient corpus amount. This also helps to beat the inflation returns.


The investment portfolio of a tax-saving fund has a balanced allocation of equity and debt securities. Besides, there is diversification in the equity category as well. The fund allocates its assets to large caps, mid caps and small caps equity stocks. The percentage allocation to large caps, mid caps and small caps is left to the decision of the fund manager. Therefore, one can diversify their overall portfolio and mitigate market risk.

Investment Discipline

Investment in ELSS funds or tax saving funds has a minimum lock-in for three years. This instils an investment discipline among investors. For a more efficient disciplined investment approach, one can also invest through Systematic Investment Plan(SIP). One can start with SIP as low as Rs.500. A fixed instalment is deducted at a predetermined date towards the fund.

Limitations on tax saving funds – ELSS

Unlike benefits, tax saving mutual funds also have certain limitations:

Market risk

The underlying asset class in the tax saving mutual fund is equity. The fund invests in equity stocks which are associated with high market risk. Relatively, investing in fixed tax saving investments like NPS, NSC, PPF, and others have no market risk associated with them.

Premature Withdrawal

Investing in a tax saving mutual fund scheme comes with a lock-in period. Therefore, one cannot make a premature withdrawal in case of any financial emergency. Comparatively, fixed deposits and other regular saving schemes do not have these restrictions. They come with a penalty charge in case of partial premature withdrawal.

Limited Tax Benefit

The tax benefit per year under section 80C is limited to 1.5 lakh only irrespective of the amount invested in the tax-saving mutual fund. For example, if an investor invests Rs.5 lakh in a tax saving mutual fund scheme in the current financial year, the benefits are limited to Rs.1.5 lakhs only.

Who should invest in a tax saving mutual fund?

  • Investing in tax saving funds gives a great opportunity for investors who are looking to reduce their tax liability along with capital appreciation. If one is looking for equity investment avenues which deliver significant returns in the long run, they can opt for this fund.
  • These tax saver funds are suitable for investors who have a long term horizon for investing. Usually, equity schemes perform well in the long run. Investing in this scheme which has a mandatory lock-in, it ensures that the investors remain invested.
  • Investors with a good understanding of equity risk can choose to invest in this fund. The reason is, the equity markets are equity volatile, and the underlying assets of this fund consist of equity stocks. However, investors with less understanding of equity risk or those nearing retirement should instead opt for a national pension scheme, public provident fund or other fixed return investment options.
  • Suppose one has already invested 1.5 lakhs under section 80C through different tax saving instruments. In that case, it is advisable to choose other equity schemes which do not have a lock-in period. One can also select other tax saving instruments that come under different tax saving sections—for instance, health insurance, national pension scheme and others.

How to invest through Scripbox?

One can invest in a mutual fund through SIP or lumpsum. If an investor has a considerable investment amount, they can make a lump sum one-time investment for a long term period. Similarly, SIP can be chosen if an investor wants to invest regularly, maintaining an investment discipline. One can select SIP mode as monthly, quarterly, half-yearly or yearly. SIP is usually recommended for first-time investors.

One can invest in international mutual funds through online or offline mode. Online investing is considered as an easier way then offline mode due to zero paperwork. Following is the procedure to invest through Scripbox, an online mutual fund platform:

  • Firstly, to start investing with Scripbox one has to choose a plan.
  • Secondly, they should set up an investment account.
  • The next step is to make the payment. One can make the payment instantly or at a later date.
  • The money gets deducted from the bank after payment confirmation. The money gets transferred to the respective mutual fund house.
  • Finally, the mutual fund company allots units to the investors. One will get an email or SMS confirmation for the same. Also, their Scripbox account reflects the same.

Top performing tax saving mutual funds

Following are the top performing ELSS mutual funds to invest:

Mirae Asset Tax Saver Fund-Reg (Growth)

Mirae Asset Tax Saver Fund-Growth is recommended by Scripbox within the equity-linked tax saving mutual fund category. With an existence of over 7 years, the fund has a relatively moderate history for analysis of the fund. With an AUM or relative size of Rs 10,802.014 cr, the fund is a leader w.r.t. size within the tax-saving mutual fund’s category. Over a period of time, the funds performed well by providing benchmark beating returns. The fund is ranked 2 based on the quarterly outperformance count in the category. Out of 16 quarters the fund has outperformed the category average 12 times.

DSP Tax Saver Fund-Reg (Growth)

Scripbox recommends DSP Tax Saver Fund (Growth) within the equity-linked tax saving mutual fund category. With an AUM value of 9397.02 Cr. The fund is in the top 10 in the category. With an existence of over 15 years, the fund has a sufficient history for analysis of the fund. Moreover, over these years the track record of the fund has been good. Owing to its AUM or relative size of Rs 9,397 cr, the fund is considered a leader within the tax-saving mutual fund category.

What are the other fund categories under equity funds?

Following the other categories under equity funds:

Also, in addition to the equity and debt category, mutual funds have another category called hybrid mutual funds. A hybrid fund invests in both debt and equity instruments. Additionally, one can invest in these funds either through a lump sum or SIP route. For SIP investments, one can activate the auto-debit facility through their saving account. To know more about mutual funds, its types and how they work, read our guide to investing.


Tax saving mutual funds are good tax saving options for investors who want to earn higher returns through equity exposure. Investors can also assign these investments to their long-term goals. Though returns are adequate, the tax benefit is only up to Rs.1.5 lakhs under section 80C. Investors can still hold the investment post maturity period until the funds are performing well. Tax saving funds offer a decent return on investment, which many investors consider lucrative. Additionally, to save tax one can consider top performing mutual funds to invest.