Many people look for ways to save taxes while also growing their money. One great option for this is Equity Linked Savings Schemes (ELSS), also called tax-saving mutual funds. These funds help investors save tax under Section 80C of the Income Tax Act while also giving them a chance to earn good returns. This article will guide you through the best tax-saving mutual funds under Section 80C in India, their benefits, risks, and how to invest wisely.
Understanding Section 80C
What is Section 80C?
Section 80C of the Income Tax Act, 1961, allows taxpayers to reduce their taxable income by investing up to ₹1.5 lakh per year in specific investment options. ELSS funds are one of these options, giving both tax benefits and a chance to build wealth.
Features of ELSS Funds
- Lock-in Period: ELSS funds require you to stay invested for three years, the shortest among tax-saving options.
- Stock Market Investment: These funds invest in stocks, which means your returns depend on market performance.
- Tax Benefits: Long-term capital gains (LTCG) up to ₹1 lakh per year are tax-free, while any amount above that is taxed at 10%.
- Investment Flexibility: You can invest through a lump sum amount or a Systematic Investment Plan (SIP).
Top Tax-Saving Mutual Funds Under Section 80C
1. Mirae Asset Tax Saver Fund
- Fund Type: Open-ended ELSS
- Benchmark: NIFTY 500 TRI
- Expense Ratio: Around 0.55% (Direct)
- 5-Year Returns: ~19%
- Investment Approach: This fund spreads investments across different industries, ensuring a balanced mix of large-cap, mid-cap, and small-cap stocks.
- Why Choose It?: Strong past performance, professional management, and diverse portfolio make it a good choice.
2. Axis Long Term Equity Fund
- Fund Type: Open-ended ELSS
- Benchmark: NIFTY 500 TRI
- Expense Ratio: Around 0.72% (Direct)
- 5-Year Returns: ~17%
- Investment Approach: Focuses on high-quality large-cap stocks that have good financial strength.
- Why Choose It?: Suitable for those looking for stability and consistent growth.
3. Canara Robeco Equity Tax Saver Fund
- Fund Type: Open-ended ELSS
- Benchmark: NIFTY 500 TRI
- Expense Ratio: Around 0.55% (Direct)
- 5-Year Returns: ~20%
- Investment Approach: Mixes growth and value investing, with a focus on large and mid-cap stocks.
- Why Choose It?: Offers steady returns with relatively lower risk.
4. Kotak Tax Saver Fund
- Fund Type: Open-ended ELSS
- Benchmark: NIFTY 500 TRI
- Expense Ratio: Around 0.85% (Direct)
- 5-Year Returns: ~16%
- Investment Approach: Invests in both large-cap and mid-cap stocks to balance growth and risk.
- Why Choose It?: A good option for those seeking moderate, steady returns.
5. Parag Parikh Tax Saver Fund
- Fund Type: Open-ended ELSS
- Benchmark: NIFTY 500 TRI
- Expense Ratio: Around 0.75% (Direct)
- 5-Year Returns: ~18%
- Investment Approach: Focuses on long-term value investing and includes some international stocks.
- Why Choose It?: Good for investors wanting global exposure within a tax-saving plan.
How to Choose the Right ELSS Fund?
1. Check Past Performance
Look at how the fund has performed over 3, 5, and 10 years to see if it is consistent.
2. Expense Ratio
A lower expense ratio means more of your money is used for investment rather than management fees.
3. Experienced Fund Manager
A good fund manager plays an important role in making smart investment decisions.
4. Investment Style
Some funds prefer stable large-cap stocks, while others invest in mid and small-cap stocks for higher growth potential.
5. Diversification
Funds with a mix of stocks from different industries can reduce risk and improve stability.
SIP vs Lump Sum: Which is Better for ELSS?
Systematic Investment Plan (SIP)
- Helps in regular investing with small amounts.
- Reduces the effect of market ups and downs through rupee cost averaging.
Lump Sum Investment
- Good for those who have extra money to invest at once.
- Can give better returns if invested when the market is low.
Risks of ELSS Investments
1. Market Fluctuations
Since ELSS funds invest in stocks, their value can go up and down in the short term.
2. Lock-in Period
Once you invest, you cannot withdraw your money for three years.
3. Uncertain Returns
Unlike fixed deposits or government schemes, ELSS returns are based on stock market performance.
Taxation of ELSS Funds
Short-Term Capital Gains (STCG)
Not applicable since ELSS funds have a 3-year lock-in period.
Long-Term Capital Gains (LTCG)
- Profits up to ₹1 lakh per year are tax-free.
- Profits above ₹1 lakh are taxed at 10%.
Why ELSS is a Great Tax-Saving Option?
1. Potential for Good Returns
ELSS funds have historically given higher returns compared to other tax-saving options like PPF and NSC.
2. Shortest Lock-in Period
Among tax-saving schemes under Section 80C, ELSS has the shortest lock-in period of three years.
3. Flexible Investment Options
Investors can choose between SIP and lump sum based on their preference.
4. Beat Inflation
Since ELSS funds invest in stocks, they have the potential to outperform inflation over time.
Conclusion
ELSS mutual funds are a great way to save taxes and grow your money at the same time. Selecting the right fund depends on your risk appetite, investment goals, and market understanding. Whether you invest in Mirae Asset Tax Saver, Axis Long Term Equity, or Canara Robeco Equity Tax Saver, make sure it aligns with your financial plan.
By investing in ELSS, you can reduce your tax burden while securing your financial future. If needed, consult a financial advisor to make the best investment decision for you.
