Navigating the annual tax-saving puzzle is a common dilemma for every taxpayer. The landscape is filled with various avenues for tax savings under the Indian income tax law, leaving many wondering about the best approach.
While some opt for endowment life insurance policies or elevate their PF contributions, others resort to long-term fixed deposits under Section 80C.
Now, these fixed-return options aren’t inherently flawed. However, the catch lies in the fact that, over an extended period, inflation gradually erodes your real returns, leaving you with a meager 1% to 2% after adjusting for inflation.
So, what’s the optimal strategy for tax savings that not only serves the purpose but also ensures substantial returns in the long haul? Enter ELSS (Equity Linked Saving Scheme), a game-changer with a myriad of benefits.
Here are some of the top features of a ELSS – Tax Saving Mutual fund:
- A tax-saving mutual fund, akin to an equity mutual fund, comes with features typical of the latter, except for the inclusion of a mandatory lock-in period.
- This lock-in duration spans three years, restricting any premature withdrawals during this period.
- The primary focus of these funds lies in equity investments, predominantly in large-cap stocks within the country. Consequently, investors can anticipate returns akin to those offered by large-cap mutual fund schemes.
- Notably, these funds offer tax-saving benefits under section 80C, allowing individuals to avail themselves of deductions up to Rs. 1.5 lakhs in a financial year.
- Investors have the flexibility to enter these schemes through either Systematic Investment Plans (SIPs) or lump-sum investments.
- ELSS funds are a long-term investment vehicle to grow your wealth and provides best of the returns under section 80C options of tax saving in India in the long period of time.
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, ELSS 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:
ELSS 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 ELSS whenever your tax structure is changed or you want to save more within 80C limits.
Best ELSS Mutual Funds to invest in 2024 are as follows:
Here are the best tax saving mutual funds to invest in 2024, 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.
Bonus Trick to save tax automatically without investing extra money:
If you can invest in tax saving fund regularly for a period of 3 years, you can automate your tax saving under 80C for the amount you were investing in that period, without investing extra money from the start of 4th year.
That is, start an STP (Systematic Transfer Plan) from the start of 4th year with the same amount which previously invested per month and re-invest that STP amount into the same fund and same folio number.
This way, you do not have to pay for additional investments under section 80C, but still be able to save the tax, which you would have saved by paying fresh SIPs in a tax saving fund.
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:
Investing in tax-saving funds has been my preferred choice over the past decade, and it has proven to be highly effective. Not only do these funds offer tax benefits, but they have also outperformed other fixed assets such as insurance, FDs, and PF, significantly growing my investments.
It’s crucial to view tax-saving funds not merely as a means to save taxes but as a vehicle for achieving long-term financial goals. These funds have consistently delivered returns comparable to, and sometimes even better than, large-cap funds over the past five to ten years.
Incorporating tax-saving funds into your overall investment strategy is essential for the sustained growth of substantial wealth, aligning with your long-term financial aspirations.
Very informative