Maximize Returns While Saving Taxes: A Smarter Approach for the Informed Investor
Every year, taxpayers face the familiar challenge of optimizing their tax-saving investments. With a variety of options available under the Indian Income Tax Act, choosing the right path can be overwhelming—even for seasoned investors.
Traditional choices like endowment life insurance policies, enhanced Provident Fund (PF) contributions, or long-term fixed deposits under Section 80C offer safety and predictability.
However, there’s a hidden cost: inflation. Over time, the real, inflation-adjusted returns from these fixed-income instruments often dwindle to a modest 1–2%.
As an investor, settling for minimal real returns defeats the purpose of wealth creation.
So, how can you strike the right balance between tax savings and meaningful returns?
Enter Equity Linked Savings Schemes (ELSS)—a tax-saving instrument with the dual advantage of equity market potential and Section 80C benefits.
With the shortest lock-in period among tax-saving options (just three years) and the potential for significantly higher long-term returns, tax saving funds offer a compelling alternative for investors aiming to grow their wealth while optimizing tax liability.
In today’s economic environment, where smart investing is just as important as tax planning, tax saving funds stands out as a strategic choice for the goal-oriented investor.
Here are some of the top features of a ELSS – Tax Saving Mutual fund:
- Equity Linked Savings Schemes (ELSS) are a unique category of mutual funds that combine the growth potential of equity markets with the benefit of tax savings under Section 80C of the Income Tax Act.
- Structurally similar to equity mutual funds, tax saving funds primarily invests in equity markets, with a strong focus on large-cap stocks. The key distinction is a mandatory three-year lock-in period, during which withdrawals are not permitted. This relatively short lock-in—compared to other tax-saving instruments—makes tax saving funds one of the most flexible and investor-friendly options under Section 80C.
- Investors can expect returns in line with those of diversified equity funds, particularly large-cap schemes, making tax saving funds an attractive option for those looking to create long-term wealth while optimizing tax outflows.
- Under Section 80C, investments in tax saving funds are eligible for tax deductions of up to ₹1.5 lakh per financial year, helping reduce your taxable income while keeping your money actively invested in high-growth opportunities.
- Whether through Systematic Investment Plans (SIPs) or lump-sum contributions, tax saving funds offers the flexibility to invest in a way that aligns with your financial goals and risk appetite.
- For the savvy investor, tax saving funds represents the best of both worlds—tax savings today and wealth creation for tomorrow.
Here are top advantages to invest in ELSS mutual funds:
1. Less period of Lock in:
Tax-saving funds stand out with a brief 3-year lock-in period, offering flexibility compared to other 80C tax-saving investments.
In contrast, alternative options may necessitate longer commitments, ranging from 5 to 15 years, albeit delivering moderate returns over an extended investment horizon.”
2. Best returns over a long period:
Over the past two decades, tax-saving mutual funds (ELSS) have consistently outperformed other 80C tax-saving options, including NPS, and have shown nearly double the returns of endowment insurance plans.
Notably, these funds often exhibit superior performance compared to large-cap funds, making them a compelling choice for investors who may not necessarily need to allocate separate investments to large-cap funds.
Beyond tax-saving benefits, tax saving funds funds can play a crucial role in wealth creation due to the potential for capital appreciation over the long term.
Also Read: Best Mutual Funds to Invest in 2024 in India
3. Brings discipline in investment process:
Embrace the power of tax saving funds by opting for Systematic Investment Plans (SIP) on a monthly basis.
This is a boon for salaried individuals who may not have a lump sum for investment, enabling them to invest as per their monthly savings without incurring extra charges.
Through SIP, your investment is systematically spread across different market levels, eliminating the need for market timing, even with tax saving funds.
This approach not only diversifies your investment but also cultivates a disciplined and emotionally balanced investment strategy over time.
4. No need of additional large cap mutual fund:
A tax saving mutual fund scheme is as good as a large cap mutual fund scheme, because it has the mandate to invest in stock markets of minimum of 80%, to grow your money and create wealth in a long period of time.
Tax-saving funds have outperformed in the large-cap category over the last decade, surpassing returns from traditional large-cap equity mutual funds.
Consider incorporating tax-saving funds into your equity mutual funds portfolio, allowing you to diversify and invest any remaining surplus in other categories of equity mutual funds.
5. Small amount to start investing:
You can start investing in a tax saving fund as low as Rs.500 by which you can invest in the biggest company’s stocks with a little amount. Then, you could invest through SIPs every month and no hassle of tracking and investing manually.
Each year or in between you can make a lumpsum or increase the amount of SIP each year in these funds, as your income increases almost every year.
However, you should start investing in tax saving funds right from the month of April of every year and do not wait for last minute to show your tax saving investments in march.
Investing through the SIPs can be a great advantage to get the rupee cost averaging, meaning, you can invest at every level of the market, more units at lower prices and lesser at higher market levels.
6. Better taxation treatment on returns:
Capital gains from tax saving funds gets the same treatment in Income Tax Calculation as any Equity mutual funds investment with the addition that you can show the invested amount as saving under section 80C.
Long Term Capital gains (LTCG) are only taxable if the gains exceed Rs.1 lac during the financial year after the period of three years. LTCG attract a tax of 10% on the amount exceeding Rs.1 lac.
As you can see there are many advantages of saving tax from an mutual funds route. The key here is to invest for 10 or 20 years regularly, not only you will save tax, but also, you can create big wealth from only this particular investment.
For instance, suppose you invest only Rs.10,000 each month or Rs.1,20,000 for a year, considering a conservative return of 12%, for next 20 years, you can make Rs. 99,91,479, which is just about a Rs.1 crore from tax saving fund only, in addition to the tax you saved.
7. Flexibility:
tax saving funds funds offer flexibility in terms of fund management. Investors can choose growth or dividend options based on their preferences.
Also, you can shift to another schemes within tax saving mutual funds inside a financial year and still will be counted as tax savings.
Moreover, add or reduce amount to your running SIPs or investments in tax saving funds whenever your tax structure is changed or you want to save more within 80C limits.
Best ELSS Mutual Funds to invest in 2025 are as follows:
Here are the best tax saving mutual funds to invest in 2025, through SIPs or even lumpsum investments:
| S.No. | Best Tax Saving Fund Names |
| 1. | Bandhan Tax Advantage (ELSS) Fund |
| 2. | Canara Robeco Equity Tax Saver Fund |
| 3. | Motilal Oswal ELSS Tax Saver Fund |
| 4. | Quant Tax Plan |
All of the above tax saving funds are performing well for the last 5 years, you may choose any one of combination from the above list.
However, you do not have to invest in all of above-mentioned funds. The selection of the funds list has been done based on the long-term performance of the funds and their volatility with respect to the returns made.
Funds are being mentioned above in the sequence of the preference, so, you may choose the funds starting from the 1st and then to 2nd or 3rd if required.
💡 Smart Hack: Automate Your Tax Savings Without Extra Investment
Looking to save taxes every year—without committing fresh money each time? Here’s a bonus trick that smart investors use to keep saving under Section 80C automatically after just 3 years of disciplined investing.
🔁 Step-by-Step Strategy:
- Years 1 to 3:
Start a monthly SIP in an ELSS (Equity Linked Saving Scheme). This will give you tax benefits under Section 80C and build a solid investment base. - From Year 4 Onwards:
Here’s the trick—set up a Systematic Transfer Plan (STP) from your original tax saving funds investment to reinvest the same monthly amount into the same tax saving funds and folio.
✅ What This Does for You:
- You continue getting 80C tax benefits every year.
- No need to invest new money—your existing corpus funds your ongoing tax-saving SIP.
- Your original investment starts working like a tax-saving machine, automating your deductions without straining your cash flow.
🧠 Why It Works:
- ELSS has a 3-year lock-in, so from Year 4 onward, the units invested in Year 1 become eligible for withdrawal.
- You use this freed-up amount to fund new tax saving funds investments, keeping the tax benefit cycle going—without needing to invest extra cash.
This smart reinvestment loop helps you optimize returns, automate tax planning, and preserve liquidity—all while meeting your annual 80C targets.
However, there some cautions to be aware of before applying to above mentioned technique for tax saving:
When engaging in a Systematic Transfer Plan (STP), it’s crucial to be aware of the long-term capital gains tax implications, as any redemption of units exceeding Rs. 1 lakh in a year is subject to taxation.
Moreover, regularly withdrawing investments every three years may hinder the potential for building substantial long-term wealth and compounding of the amount you have accumulated.
The gains accrued are added back to the invested amount, creating a growing corpus over time through equity linked saving schemes.
Consequently, the accumulated savings might surpass your initial expectations, offering a higher-than-anticipated financial cushion for your long term financial goals.
Conclusion: Turn Tax Saving Into Wealth Creation
Over the past decade, investing in tax-saving mutual funds has not only helped me reduce my tax liability—it has significantly contributed to building long-term wealth. Unlike traditional tax-saving instruments like insurance, FDs, or PF, ELSS funds have the unique advantage of equity-driven growth, delivering returns that rival—and often outperform—many standard investment options.
The real power of tax-saving funds lies in shifting your mindset: from tax-saving as an obligation to tax-saving as a strategic opportunity. These funds aren’t just about deductions under Section 80C—they’re about aligning your investments with your long-term financial goals.
Start your tax saving funds investment today to save tax and grow wealth smarter.