Why ELSS funds is a good tax saving option

Investors are constantly in the lookout for opportunities or schemes that can help to grow wealth, save taxes, generate returns, and plan their finances in a better way. There are various similar schemes available in the market but most of their returns are taxable according to the Income Tax rules.

Keeping the fact in mind that investors should look at saving taxes and not avoiding them, this is where ELSS funds or tax savings funds steps in. Through ELSS funds you can get tax benefits under Section 80C. They have the shortest lock – in period of 3 years, as compared to other tax saving instruments.

You should know that when you invest in schemes like PPF, bank tax savings FD and ELSS etc. you can claim up to Rs. 150,000 in a financial year as deduction from your gross total income under the Income Tax Act 1961.

The table below will explain how this works:


(Illustration of Tax exemption for an individual less than 60 years in receipt of salary income for the financial year 2021-22)

From the above chart you can see that if you invest Rs 150,000 in any tax saving instrument including the ELSS funds, you can save substantial amount of taxes under Section 80C.

Why invest in Tax Saving Funds?

High returns – An opportunity to grow your money by investing in ELSS funds. In the last 5 years, ELSS tax saving funds as a category has given over 16.50% annualized returns (source: www.advisorkhoj.com)

Tax efficient - Long term capital gains (LTCG) on the profits made on ELSS mutual funds is completely tax free in a financial year. Profits above Rs 1 Lakh is taxable at 10% only + surcharge. The question of short term capital gains is not applicable for ELSS funds as these are by default locked-in for 3 years from the date of investment.

Least lock-in period - ELSS funds has the least lock-in period of 3 years compared to PPF (15 years) and bank fixed deposits (5 years).

Dividend payout option - You can opt for dividend payout option on your investment which helps you realize some potential gain during the lock-in period of 3 years. You must also note that dividend payments are made from the NAV of the Scheme and therefore, the NAV of the scheme will fall to the extent of the dividend payment on the date of dividend. However, please note that the dividends are taxable.

From the above pointers, it is understood that ELSS funds are the best option for investors when it comes to saving taxes and growing their wealth at the same time.

If you want to check ELSS NAV mutual funds before investing, do check the same at AMC website or the website of AMFI India. NAV mutual funds of any scheme gives you a fair idea before investing as to how many units you can accumulate if you invest in a ELSS fund.  

We discussed ELSS funds and how they are a unique option for investors to create wealth while saving taxes. You should consult a mutual fund advisor before investing in tax saving funds.

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