The Various Benefits of Investing in Tax Saving Mutual Funds
Extended lock-in periods and minimal returns are two of the most important reasons why people are now looking for better tax-saving options. This has made ELSS a very popular choice among taxpayers. Check out the top benefits of ELSS funds in this post.
PPF, FD, ULIP, and NSC are some of the traditionally popular tax-saving instruments. But the extended lock-in period and minimal returns offered by these instruments have encouraged people to look for better tax-saving options. For most of the people, their search ends on Equity Linked Saving Scheme (ELSS) funds.
Apart from the tax savings, these funds offer a host of benefits that make them a far better option as compared to the traditional instruments.
Some of the most important benefits of these funds are-
1. Tax Deduction
Needless to say, the most important advantage of ELSS funds is the tax benefit they offer. Under Section 80C of the IT ACT, these funds are eligible for a deduction of up to Rs. 1.5 lakhs in a financial year. By investing in these funds, you can save up to Rs. 45,000 in taxes in a financial year.
If you cannot invest Rs. 1.5 lakhs at once, you can also start a SIP of Rs. 12,500 for 12 months in an ELSS fund to gain the tax benefit.
2. Higher Returns
ELSS funds are hybrid funds which invest most of the money in the equity and equity-related securities while the rest is invested in debt and money market.
With the majority of the portfolio invested in equity, the chances of generating better returns as compared to traditional tax saving options are higher with ELSS funds. Most of the top funds have been able to deliver gains of at least 10% on a consistent basis.
3. Shorter Lock-In Period
Most of the other tax saving instruments have a minimum lock-in period of 5 years. But with ELSS funds, the lock-in period is only three years. You can withdraw all of your money invested in these funds once this lock-in period is over.
However, it is recommended that you should remain invested in them as long as possible for its excellent long-term wealth generating potential.
4. Tax-Free Capital Gains of Up ToRs. 1 Lakh
As ELSS funds invest most of your money in equity, their taxation too is similar to equity mutual funds. When you redeem the units after the lock-in period of 3 years, the LTCG (Long-Term Capital Gains) of up to Rs. 1 lakh are tax-free.
If your gains after 3 years are more than Rs. 1 lakh, the gains would be taxed at 10% without the indexation benefit.
ELSS funds invest your money in multiple sectors of the equity market, and some part of the portfolio is always invested in the debt market. This makes them one of the most diversified mutual fund options.
If you are aiming to create a diversified investment portfolio, tax saving mutual funds are the best way to achieve the diversification benefit.
Taxation is one of the most important considerations with any type of investment. Combined with the tax deduction and minimum LTCG tax, ELSS funds are one of the most tax-efficient investment options.
Make sure that you thoroughly understand how these funds work along with their pros and cons before you invest to save taxes and enjoy long-term capital appreciation.