Tax-saver Mutual Funds

Equity-linked Savings Scheme (ELSS) is a tax-saving mutual fund where the majority of the corpus is invested into equity-oriented securities. Under Section 80C of the Income Tax Act of 1961, ELSS investments can reap tax benefits up to ₹1.5 Lakhs. 

These funds, with a lock-in period of 3 years, are primarily invested in a pre-decided percentage of companies, determined on the basis of market capitalisation and sectors. This helps one develop a risk-adjusted portfolio along with building a corpus over a long-term basis.

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What are Tax Saver Mutual Funds?

Tax-saver mutual funds or Equity Linked Savings Schemes (ELSS) are equity mutual funds that invest most of your corpus in equity shares or instruments related to equity. They are also known as tax-saver funds, and investing in equity funds of this type can offer tax benefits.


By investing in equity mutual funds like ELSS, you can get a tax exemption of up to ₹1.5 Lakhs from your total taxable income. These tax benefits are included in Section 80C of the Income Tax Act.


Now that you are familiar with what an equity fund is and how you can enjoy tax benefits by opting for tax-saver funds, remember that such funds always come with a lock-in period. Despite a mandatory lock-in duration of 3 years, ELSS funds have a prominent standing in the financial market.


This is so because such equity mutual funds are invested in a growth-oriented equity market. Hence, you can earn considerable returns and generate sufficient wealth in the long term.


Furthermore, the compulsory lock-in duration of 3 years encourages financial discipline by inculcating a habit of long-term investments.


So, understanding the true meaning of an equity fund is critical before you plan to invest in these tax-saver funds. Remember, around 80% of your assets are invested in equities when you opt for a tax-saver equity mutual fund.

How Do Tax Saver Funds Work?

When researching equity mutual funds, keep in mind that ELSS funds are open-ended schemes. Open-ended funds are those wherein you can stay invested for as long as you wish.


The prime reasons for the growing popularity of tax saver funds are higher returns and a lower lock-in period compared to other tax-saving schemes. In addition, after the lock-in tenor is complete, you can redeem or switch the units. 


You can invest in these tax saver funds across dividend and growth options. As a potential investor, all you need to consider is the track record of these equity mutual funds before choosing the scheme.


These funds collect money from various investors and invest the corpus in the equity market. Remember that the compulsory 3-year lock-in period does not allow you to withdraw the investment during this tenor.


Assuming you have opted for the SIP or Systematic Investment Plan, note that each instalment carries a lock-in duration of 3 years. Finally, when you redeem your units, you can withdraw only the ones that have completed the lock-in duration.


You can redeem them at the applicable NAV or Net Asset Value of each unit. Say that you have invested in your first SIP on February 1, 2023, and the second SIP on March 1, 2023. The first SIP will have a lock-in duration until February 1, 2026. Similarly, you can redeem the second SIP only after March 1, 2026.


This is how an equity mutual funds investment works, and a thorough knowledge of the same is essential for you to invest in an informed manner.

Types of Tax Saver Funds

There are three types of equity funds, such as:


  • Growth funds

  • Dividend funds

  • Dividend reinvestment funds


In the growth option, you can enjoy the gains only when you redeem the units. When the total NAV of your unit increases, your profit also multiplies. However, you may not benefit from dividends when you opt for top equity mutual funds with a growth option.


You can enjoy dividends when you invest in an equity mutual fund scheme with a dividend option. However, these dividends are only applicable when your units have excess profits. 


In the dividend option, you are entitled to pay taxes according to your income tax slab. However, you can claim them when filing your annual returns. You can either withdraw the dividend or reinvest them in a scheme of your choice.


If you opt for equity mutual funds in India with a dividend reinvestment option, you are entitled to reinvest the dividends in the existing tax saver scheme. 


When the market conditions are favourable, opting for the top-performing equity mutual funds with dividend reinvestment options can fetch significant returns. You may invest in these tax saver funds as a lump sum or in SIPs. 

Hence, when investing in long-term equity funds, you can opt for small monthly plans like SIPs to help you save tax.

Features of Tax-Saver Funds

Now that you have a clear idea of what is an equity fund, here are a few salient features of these tax saver funds:


  • Investing in some of these best equity funds can offer you the benefits of earning high returns coupled with tax benefits

  • Amongst various Section 80C investments, these equity-based mutual funds are the ones offering the lowest lock-in duration of 3 years

  • All you need to start these long-term equity mutual funds is a minimum investment of ₹500 as SIPs

  • Choose monthly SIPs or a lump sum when investing in these diversified equity mutual funds

  • You can either redeem the units after the lock-in period or choose to stay invested across a longer investment horizon

  • These long-term equity investments have an excellent diversifying portfolio of equities that can help you combat fluctuating market conditions

  • Enjoy the tax benefits of long-term capital gains after the lock-in duration of 3 years

Benefits of Investing in Tax Saver Funds

When you opt for the best equity mutual funds to invest in, you can enjoy many benefits. One of the most significant benefits of these tax saver funds is tax benefits of up to ₹1.5 Lakhs. 


Moreover, you have a shorter lock-in period of 3 years with respect to other 80C investments like PPF, tax-saving FDs and more. Another important advantage of investing in top equity funds is that you can start your investment with a small amount in regular intervals. These may be weekly, quarterly, monthly or even annual SIPs. 

Otherwise, you may opt to do it in a single go when investing in top equity mutual funds in India. As the investment portfolio is diversified, you can generate reasonable returns with these ELSS funds.

Taxation on Tax Saver Funds

As mentioned, these funds provide tax benefits of up to ₹1.5 Lakhs according to Section 80C. However, note that these deduction benefits apply to the principal amount. 


Moreover, it is a cumulative benefit, which means this section applies to all tax-saving investments such as PPF, NSC, ELSS, etc. As these schemes have a mandatory lock-in period of 3 years, you are entitled to receive long-term capital gains (LTCG) upon the redemption of units. 


Note that these gains are not taxable up to ₹1 Lakh for a financial year. However, if your gains exceed the limit, you will be taxed at 10% of the total gains exceeding the amount ₹1 Lakh.

Risks Associated With Tax Saver Funds

While investing in these tax saver funds offers tax benefits, be aware of the risks associated with these market-linked schemes. These schemes help generate potential returns across the investment horizon, but you need to be cautious.


Since these schemes depend on the market, be informed about your risk exposure and the performance of capital markets. However, remember that investing for the long term helps to mitigate risk. 


In addition, ELSS funds come with a ranking that can help you make the right choice. What’s more, you can check the fund performance of the scheme before you invest and even find out about fund managers and their experience before you sign up! 

For instance, some of the best equity funds to invest in include the DSP Tax Saver Fund, HDFC Tax Saver Fund and UTI Master Equity Plan based on the current market performance. When you invest via Bajaj Markets, you can benefit from professional fund management and easy comparison of different schemes.

Frequently Asked Questions About Mutual Funds

Do tax-saving funds offer higher returns when compared to other tax-saving schemes?

Tax-saving ELSS schemes generate returns based on market conditions. So, if the market is doing well, you can get higher profits and vice versa. On the other hand, other tax-saving schemes like PPF have a fixed rate of return. This reduces your exposure to risk. So, tax-saving mutual funds have the potential to offer higher returns when compared to other tax-saving schemes.

What are a few equity funds examples providing tax benefits?

How to choose the best long-term equity fund?

How to invest in good equity mutual funds in the Indian market?


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