Did you know that there are ways to save tax on a lot of things – including our investments? All the more – with mutual funds becoming extremely popular, they offer you the chance to make investments in different assets and get great returns. This also means you have the choice of close-ended funds, open-ended funds, and much more. Here we can talk about the tax benefits when it comes to your returns through mutual funds.

What are Tax-Saving Mutual Funds?

Tax Saving Mutual Funds, often known as ELSS (Equity Linked Savings Schemes), are a type of Equity Mutual Fund that provides tax benefits under Section 80C of the Internal Revenue Code. As a result, investments in a tax saver mutual fund can provide a tax deduction benefit of up to rupees one and a half lakh in a financial year under Section 80C’s cumulative limit.

Investments in tax-saving mutual funds have a three-year lock-in period during which they cannot be redeemed. Among all tax-saving investments, this has the shortest lock-in time. ELSS funds could also be redeemed as a lump payment or via SWP (systematic withdrawal plan) when the lock-in period has ended, depending on the investor’s needs.

How Do These Tax-Saving Mutual Funds Work?

Mentioned below are the unique characteristics of equity-linked savings plans that make them a lucrative investment option for investors:

  • If you can’t afford to put a substantial sum of money into the fund, you can start investing in ELSS with as little as Rs.500. Unlike PPF and NSC, ELSS has no maximum investment amount.
  • While there is no upper limit, tax benefits would only be available for investments worth Rs.100,000.
  • Investments in tax-advantaged mutual funds have a three-year lock-in period.
  • Because ELSSs are mutual funds, their investments are subject to market risks, which can be low, medium, or large depending on where the assets are invested.
  • ELSS (Equity Linked Savings Schemes) and open-ended mutual funds are the most common types of tax-saving mutual funds.
  • Subscribers can nominate themselves for these mutual funds.
  • The majority of ELSS schemes have entrance and exit loads. These are the fees that providers impose on the purchase, sale, redemption, and transfer of fund units by investors.

Though every investment has its own sets of risks – there are enormous amounts of benefits too.

Perks of Investing in Tax-Saving Funds

Tax-advantaged mutual funds offer a variety of advantages to investors. The following are some of the most important:

  • Tax savings to Rs.1.5 lakh are available on investments made in these schemes.
  • Long-term capital gains are not taxed in these systems.
  • These plans can be used to save for future expenses such as buying a car or putting down a down payment on a house.
  • SIPs will allow you to invest on a monthly basis, eliminating the need to invest all at one time.
  • The assets in the portfolio are not focused in one location, and they are kept diverse to decrease the chance of big losses.
  • When you do not withdraw your cash – it would continue to grow and give you an essential sum of savings for a rainy day.
  • While you won’t be able to withdraw the capital, you will be able to withdraw the dividends earned, even if the lock-in period is still in effect.
  • Other investing options have a lock-in duration of 6 to 15 years, while these mutual funds only have a 3-year lock-in time.
  • Investments can be made at any time of the year because these programs are open-ended.
  • The funds are carefully managed by competent fund managers who have a thorough understanding of the market. As a result, even investors with no prior knowledge of the market can invest in these funds.

Should I Choose an ELSS Fund or an Equity Fund?

The yield on an ELSS fund will typically be higher than that of an equity fund due to the tax benefit. ELSS not only reduces taxes but also forces you to invest for the long term. This is owing to the mandatory three-year lock-in period. As a result, equities fund managers do not need to churn as regularly or maintain cash on hand. Normally, this would have worked in the ELSS funds’ favor. Is this, however, the case?

Surprisingly, there is no factual evidence that the ELSS Funds outperform the market in any way other than the tax benefit. They perform similarly to regular funds, if not worse, than ordinary equity funds. If your Section 80C limits have been reached, you may prefer equity funds over ELSS funds because you will not be locked in.

Is it possible to stay on the ELSS after three years? Depending on how the fund has fared, you have a choice. After the three-year lock-in period expires, it’s just like any other equity fund, with the same level of liquidity.

Are you eager to know some of the top tax-saving mutual funds in 2022? They are here for you.

Top Tax-Saving Mutual Funds of 2022

  • Aditya Birla Sun Life – Tax Relief 96 Fund
  • L&T Tax Advantage Fund
  • Tata India Tax Saving Fund
  • IDFC Tax Advantage (ELSS) Fund
  • DSP BlackRock Tax Saver Fund
  • Aditya Birla Sun Life Tax Plan-Growth
  • Kotak Tax Saver Fund
  • Axis Long Term Equity Fund
  • HDFC Tax Saver Fund
  • Invesco India Tax Plan Fund


When you have enough time to be invested – in precise, three years, then you can go ahead with ELSS funds. They are a great choice when you are trying to save up more on the taxes.

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