What Are Tax-Saving Mutual Funds And How Do They Help You Save Taxes?

Mutual funds are various types of investors that benefit of m capital growth. Taxes saving mutual funds are one such type that offers dual benefits of saving taxes as well as delivering exponential returns on investments. Also known as equity-linked saving schemes or ELSS, the tax saving mutual funds are opted by investors who wish to grow their investments and save their returns from getting taxed. Let’s explore the meaning and benefits of tax-saving mutual funds and how they can help investors save taxes:

What are tax-saving mutual funds or ELSS?

Considered to be one of the most popular mutual fund schemes, an equity-linked saving scheme or ELSS self equity mutual funds that offer investment opportunities to investors in Indian equities. The only difference between ELSS and normal mutual fund schemes is that investors do not have to pay additional taxes on the returns generated from the ELSS mutual funds. Offering tax exemption benefits under section 80 C of the Income Tax Act, investors can claim the deduction through investment in the ELSS scheme up to ₹1,50,000 per year. Using an SWP calculator, investors can analyse and identify the right SIP amount which can help them in receiving the maximum benefits of ELSS investments.

Features of tax-saving mutual funds

1. Saving taxes

Tax-saving mutual funds help investors to deduct an amount upto ₹1.5 lakh from their total income through ELSS investment. With investment in the tax saving mutual fund schemes, investors receive taxation benefits reducing their taxable income up to the amount invested.

2. Lowest lock-in period

As compared to other tax saving schemes like provident funds and national savings certificates, the tax saving mutual fund schemes have the lowest lock-in period of three years which proves beneficial for short-term investors.

3. Investment opportunity into equity

Another great benefit of investing in an equity-linked saving scheme is that investors receive exposure to Indian equities. Apart from saving taxes, investors even receive an additional benefit of capital growth which can expand exponentially according to the performance of the underlying stock price.

How can ELSS investment help investors save tax?

Investors through investment in ELSS schemes can reduce their total taxable income and receive taxation benefits which can prove beneficial in the long run. Investors can claim a tax exemption at the end of the financial year from the total income up to ₹1.5 Lakh. Investors falling under different tax brackets can reduce their total taxation liability thereby helping them to use the available amount for further investments. The returns generated from investment in the equity-linked saving schemes were also taxed under the long-term capital gains tax regime. Instead of adding the returns generated to the total income, investors are only required to pay the long-term capital gains tax. Moreover, with a low lock-in period of three years and better returns through equity investments, equity-linked saving schemes offer maximum growth potential.

Investors with tax saving mutual funds can receive various benefits that cannot be overlooked. They can diversify their investments by opting for ELSS for stable returns and tax benefits. With careful planning and sound decision-making, investors receive access to huge growth potential through investment in tax-saving mutual funds in a financial year.