What are Tax Benefits of Mutual Funds Over Other Investments?

In India, tax exemption on income is applicable only up to a certain salary bracket beyond which you are required to pay taxes every year. But there are several financial assets and liabilities that allow you to save on taxes in some way, whether you have purchased an insurance policy, home loan, or invested in a tax saving FD.

Traditional investments are risk-free as well as help you save taxes, but they may not be helpful in accelerating your corpus & withstand the inflation in the country. So, if you are looking for good returns and tax saving schemes under 80c, you should invest in Equity Linked Saving Scheme (ELSS). This is the only scheme in the category of mutual funds that offers a tax benefit option, let’s explore more about it. 

ELSS or Equity Linked Saving Scheme is an open-ended equity mutual fund that invests 80% of its assets in equity and equity-linked financial instruments. It is popularly preferred by several investors for growing wealth and tax savings. It has a mandatory lock-in period of 3 years.

Read More: - ELSS Funds and it’s Benefits

As compared to other tax saving schemes or options like 5-year Tax Saving Fixed Deposit, National Savings Certificate (NSC), Pension Provident Fund (PPF), etc., ELSS provides better returns for the long-term. Even if the scheme has a lock-in period of three years, you can continue investing in it for a longer period. This will not only help you build a sizeable corpus for the future but also help you beat inflation.

Here’s a table that showcases how the scheme performs in comparison to other alternatives:

1. Dual benefit

By investing in ELSS tax saving mutual funds, you can benefit from high returns as well as tax savings. Typically, the scheme provides returns in the range of 15-20%. This is highest among other tax savings avenues like PPF or Tax Saving FD with the duration of 5 years. In terms of tax benefit, you can save up to INR 1.50 lakh in a financial year under Section 80C of the Income Tax (IT) Act

2. Lowest lock-in period

ELSS has the lowest lock-in period of 3 years. Even if you are investing for 3 years, you can earn maximum returns. Although it is a minimum investment duration scheme, you can choose to stay invested for the long term. Redemption before the lock-in period is not permitted.

3. Benefit of compounding:

If you stay invested for a longer period, say up to 15 years or more, you can benefit from the power of compounding in the long run. Even financial experts recommend a long-term approach for ELSS.

4. Mode of investment

You can invest in an ELSS via Systematic Investment Plan (SIP), where you can contribute a fixed sum at period intervals. You can also choose to do a lumpsum investment.

5. Safe and Transparent:

It is completely safe to invest in ELSS mutual funds as the investment sector comes under the purview of SEBI. If you are a beginner, you should think of consulting an expert or seasoned financial advisor for wealth building.

• Every person who earns income and is required to pay tax, can reduce their tax liability and build wealth by investing in Equity Linked Saving Scheme (ELSS)

• Since mutual funds are market-linked products, you should gauge your risk tolerance and understand your investment goals

• You can begin your mutual fund investment with AU Small Finance Bank through AU 0101 App/NetBanking

The above blog is published on 29th January 2023.