How to Save Tax by Investing in Mutual Funds
Investing in mutual funds can be a great way to grow your wealth and save on taxes. Let’s delve into how mutual funds can help you save tax.
Equity Linked Savings Scheme (ELSS)
Mutual funds, also known as Equity Linked Savings Scheme (ELSS), are great tax-saving instruments under Section 80C of the Income Tax Act, 1961. This section allows you to claim benefits from your taxable income if you put your money into certain investments.
ELSS is an equity diversified fund which is linked to the equity market. It is a mutual fund scheme that invests your money into equity and equity-related securities. ELSS has a lock-in period of three years, so you have to leave the money in these funds for a minimum of three years. And the longer you retain your investment into these funds the higher the chances of you making money.
You are allowed to invest up to Rs 1.5 lakh in tax-saving funds. You will get a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.
Advantages of ELSS
1. Equity-Linked Returns: ELSS funds are the only tax-saving funds within the Rs 1.5 lakh limit which has the additional advantage of giving equity-linked returns.
2. Dual Benefits: Investing into ELSS allows you dual benefits – you get capital appreciation and tax benefits.
3. Shortest Lock-In Period: ELSS has the shortest lock-in period of three years when compared to other tax-saving instruments like PPF and NSC.
4. Good Returns Over Long Term: Since they are equity market linked, ELSS funds can bring in good returns over the long term, especially if retained after the lock-in period is over.
5. Tax-Free Dividends: Dividends from ELSS funds are tax-free during the investment period.
6. Tax-Free Profits: Profits from the sale of ELSS fund units are considered long-term capital gains and hence, are tax-free.
How to Invest
The best way of investing into ELSS funds is through monthly SIPs (systematic investment plan). The minimum investment through a SIP can be as low as Rs 500 per month. At the start of every year, work out the statutory deductions and calculate what you have left over from the Rs 1.5 lakh limit. Divide this amount by 12 to decide your SIP amount.
Conclusion
Mutual funds give you the advantage of saving tax while providing your investment to achieve long-term growth¹. Always remember to do your own research and consider your financial goals and risk tolerance before making any investment decisions.