Tax saving mutual funds invest at least 80% of their assets in equity. Tax-saving mutual funds are essentially equity-linked saving schemes (ELSS) that offer tax benefits to investors under Section 80C of the Income Tax Act of 1961. The lock-in period develops a good habit among investors to focus on long-term investing. These tax-saving mutual funds also offer the benefit of enhancing portfolio returns over the long term. However, investors should also be aware of the risks associated with equity investing compared to fixed-income instruments like the Public Provident Fund (PPF). In this blog, we will explore some best tax saving mutual funds and their overview.
List of Top Tax Saving Mutual Funds
Here's a list of top tax saving mutual funds in India.
Fund Name
Minimum Investment
1 Year Returns
Fund Size (in Cr)
Bandhan Tax Advantage (ELSS) Fund
Rs. 500
16.30%
Rs. 5160
Kotak Tax Saver Fund
Rs. 100
14.80%
Rs. 4199
Franklin India Taxshield Fund
Rs. 500
43.69%
Rs. 6,179.88
Mirae Asset Tax Saver Fund
Rs. 500
13.40%
Rs. 17,985
Mahindra Manulife ELSS Fund
Rs. 500
22.90%
Rs. 3,602.19
PGIM India ELSS Tax Saver Fund
Rs. 500
34.61%
Rs.657.15
Canara Robeco Equity Tax Saver Fund
Rs. 500
17.5%
Rs.7509.52
Motilal Oswal ELSS Tax Saver Fund
Rs. 500
24.52%
Rs. 3,205.13
Disclaimer: This list of mutual funds contains data updated as of 26th April 2024. However, it's important to conduct detailed research before making any investment decisions in these stocks.
Who Should Invest in These Tax Saving Mutual Funds?
Factors to Consider Before Investing in the Best Tax Saving Mutual Funds
Features of Tax Saving Mutual Funds
Comparing Tax-Saving Investment Schemes and ELSS Funds
Benefits of the Best Tax Saving Mutual Funds
Risks of Investing in Tax Saving Mutual Funds
Overview of the Best Tax Saving Mutual Funds
Let’s now take a brief look at some of the best tax saving mutual funds.
What are Tax Saving Mutual Funds?
Tax saving mutual funds are similar to other mutual funds, but they have the extra benefit of saving taxes. Investments in tax saving mutual funds are eligible for tax benefits under Section 80C of the Indian Income Tax Act. This unique feature makes tax saving mutual funds different from other types of mutual fund schemes.
Tax-saving mutual funds are also called equity-linked savings schemes (ELSS). They invest primarily in stocks and equity-related assets, but some funds are allocated to debt instruments.
How do Tax Saving Mutual Funds Work?
Tax-saving index funds invest in a portfolio of equities that reflect a certain market index. This signifies that the fund's success is closely related to the performance of the index. When the index goes up, so does the fund, and vice versa.
Tax-saver index funds are qualified for a tax reduction under Section 80C of the Income Tax Act of 1961. Investing in these funds allows you a tax deduction of up to ₹1.5 lakh.
Who Should Invest in These Tax Saving Mutual Funds?
The following types of investors may consider investing in a tax saver best mutual fund.
Factors to Consider Before Investing in the Best Tax Saving Mutual Funds
Consider the following factors before you invest in the tax saving best mutual fund.
Features of Tax Saving Mutual Funds
Here are the key features of ELSS funds.
Minimum Lock-In Period: This is the only Section 80C investment with a shorter lock-in term of three years.
Different Modes of Investment: Investors can use the SIP approach or invest in lump sums. It is preferable to select the systematic investment plan (SIP) strategy since investors may invest low amounts and also take advantage of rupee cost averaging.
Low Investment Requirement: Investors can start investing in ELSS with a minimum of Rs. 500. So, you can get tax saving on SIP.
Investment Horizon: ELSS mutual funds require an investment horizon of at least three years. Investors can stay invested for a long time, which may offer considerable returns.
Diversification: ELSS mutual funds invest the bulk of their money in equities, equity-linked instruments, and other securities, diversifying their portfolio. Diversification helps prevent significant losses under extremely volatile market situations.
Taxation: After the three-year lock-in period, long-term capital gains (LTCG) of up to Rs. 1 lakh per year from ELSS mutual funds are free from income tax. In addition, LTCG above Rs. 1 lakh are taxed at 10%.
Comparing Tax-Saving Investment Schemes and ELSS Funds
Here’s a quick comparison between ELSS and other tax-saving investment schemes.
Investment Plans
Returns Range
Lock-in Period
Tax Implications
Tax Saving or ELSS Funds
15% to 18%
3 years
Investments are tax-free, and tax deductions are available on capital gains.
Public Provident Fund (PPF)
7% to 8%
15 years
Taxes are not levied on returns, and tax deduction are available on investments.
National Pension System (NPS)
8% to 10%
Till Retirement
You get a tax deduction on investments, but the returns are partially taxable.
Tax Saving Fixed Deposits
Usually varies with different banks
5 years
Tax deductions are applicable on investments. Returns are taxable if interests are more than Rs 10,000.
National Savings Certificate (NSC)
7% to 8%
5 years
Taxes are applicable on both investments and your capital gains
Benefits of the Best Tax Saving Mutual Funds
The following are the key benefits of best tax savings mutual funds.
Tax Savings: Tax-saving mutual funds offer a tax deduction of up to Rs. 1.5 lakh under section 80C of the Income Tax Act, reducing the overall tax burden on investors.
Transparency: These funds regularly update the investors with scheme information disclosing its performance and market value. Allowing investors to easily track their portfolio.
Higher Returns: ELSS funds invest in equity schemes, so their returns may be higher than those of other tax saving investments. The compounding effect and returns from equity generally offer higher returns.
Professionally Managed: The best tax saving MF is generally managed by experienced fund managers. Their expertise helps them curate the portfolio in the best possible way.
Risks of Investing in Tax Saving Mutual Funds
The risks associated with tax-saving mutual funds are as follows.
Liquidity Risk: It refers to the risk of not being able to redeem their assets without incurring losses. Investments in ELSS funds will be locked in for three years. The investor cannot redeem or transfer the investments during this period.
Market Risk: Itis the risk of losses due to the market's poor performance. Several factors might hurt stock market values, including a recession and global events.
Conclusion Tax saving mutual funds, commonly known as Equity-Linked Savings Schemes (ELSS), provide tax benefits and capital appreciation. They allow tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. The tax benefits and shorter lock-in time make it a good investment option for investors. Hence, ELSS mutual funds allow investors to grow their wealth while saving taxes simultaneously. It provides several advantages, such as low investment requirements and compounding growth. Nowadays, you can invest in ELSS funds with an online trading app. However, remember that ELSS funds are mostly volatile equity-related products. Therefore, consider your risk appetite while making any investments.
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ELSS mutual funds are tax-saving funds that allow you to build wealth over time and also save taxes. So, this may be suitable for investors looking to reduce the tax burden.
ELSS mutual funds significantly invest in the equity market. Equities are generally very sensitive to market volatility. This makes ELSS mutual funds quite risky.
Yes, you may withdraw your funds from an ELSS fund after the three-year lock-in period. After three years, you can withdraw all your investments. However, SIP investments must be completed within three years.
PPF and ELSS are both tax-friendly investments. However, despite market risks, ELSS has a higher potential for wealth generation and liquidity than PPF. Investors should consult with a financial professional to find out whether an ELSS scheme will be appropriate for their tax planning goals.
Long-term capital gains from ELSS are tax-exempt up to Rs. 1 lakh, and dividends are tax-free. Even after the three-year lock-in period, you can continue to invest in these funds.
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