Best Tax Saving Mutual Funds in India

  • 10 May 2024
  • Read 15 mins read

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 NameMinimum Investment1 Year ReturnsFund Size (in Cr)
Bandhan Tax Advantage (ELSS) FundRs. 50016.30%Rs. 5160
Kotak Tax Saver FundRs. 10014.80%Rs. 4199
Franklin India Taxshield FundRs. 50043.69%Rs. 6,179.88
Mirae Asset Tax Saver FundRs. 50013.40%Rs. 17,985
Mahindra Manulife ELSS FundRs. 50022.90%Rs. 3,602.19
PGIM India ELSS Tax Saver Fund Rs. 50034.61%Rs.657.15 
Canara Robeco Equity Tax Saver FundRs. 50017.5%Rs.7509.52
Motilal Oswal ELSS Tax Saver Fund Rs. 50024.52%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.

 

Overview of the Best Tax Saving Mutual Funds

Let’s now take a brief look at some of the best tax saving mutual funds.

  • Bandhan Tax Advantage (ELSS) Fund

    Bandhan Tax Advantage (ELSS) Fund is an ELSS mutual fund by Bandhan MF, launched in 2013. Its expense ratio, at 0.63%, is lower than most ELSS funds. Over the past year, Bandhan Tax Advantage (ELSS) Direct Plan-Growth yielded ELSS Funds returns of 15.39%, with an average annual return of 17.58%. 
  • Kotak Tax Saver Fund

    Kotak Tax Saver Fund, an ELSS mutual fund offered by Kotak Mahindra Mutual Fund, was launched in 2013. With assets under management (AUM) of more than Rs. 4,199 crores, it falls in the medium-sized category. Its expense ratio of 0.54% is below the average for ELSS funds. Over the last year, the fund has offered around 13.63% returns. From the beginning, it has maintained an average annual return of 15.43%.
  • Franklin India Taxshield Fund

    Franklin India Taxshield Fund, an ELSS mutual fund offered by Franklin Templeton India, was launched on Apr 01, 1995. Its expense ratio is 1.84%, less than the average for ELSS funds. Over the last three years, the fund has offered 26.14% returns. Moreover, its 5-year average annual returns stand at 16.10%.
  • Mirae Asset Tax Saver Fund

    Mirae Asset Tax Saver Fund, an ELSS scheme by Mirae Asset Mutual Fund, was launched on 20 November 2015. Its AUM currently stands at more than Rs. 17,985 crores. The fund has a competitive expense ratio of 0.66%, making it one of the best tax saving funds. Last year, the fund offered a 12.39% return. Its average annual return is 18.65%.
  • Mahindra Manulife ELSS Fund

    Mahindra Manulife ELSS Fund, part of Mahindra Manulife Mutual Fund, was launched on August 22, 2016. The fund holds assets worth Rs. 679 Crores. It maintains a favourable expense ratio of 0.66%. It is one of the best tax saver mutual funds in India. Over the past year, it has offered returns of 13.25%. In addition, the fund's average annual return has stood at 13.39% since its start. 
  • PGIM India ELSS Tax Saver Fund

    The PGIM India ELSS Tax Saver Fund, an ELSS mutual fund under PGIM India Mutual Fund, was established on October 19, 2015, 8 years ago. The fund has an aggregate AUM of Rs. 568 Crores. Its expense ratio is 0.84%. Last year, the Direct-Growth plan offered around 8.73% returns. It has a good record of 14.53% average annual returns.
  • Canara Robeco Equity Tax Saver Fund

    The Canara Robeco Equity Tax Saver Fund is open-ended in the medium-sized category. Its expense ratio is 0.60%. In the last three years, it has yielded returns of 20.73%. The average return of the past five years is 18.52%. However, the fund falls in the very high-risk category.
  • Motilal Oswal ELSS Tax Saver Fund

    Motilal Oswal ELSS Tax Saver Fund is a medium-sized ELSS fund by Motilal Oswal. This Direct-Growth fund has given 17.37% returns in the last 3 years and 25.22% over the last 5 years. It is one of the good tax saver mutual funds in the high-risk category.

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.

  • Investors Looking to Reduce Taxes

    ELSS funds are suitable for taxpayers willing to accept the risks involved with an equity-based tax-saving mechanism. This is the only three-year mutual fund scheme that qualifies for Section 80C tax advantages.
  • Long-Term Investors:

    The lock-in period of ELSS funds assures you that you will remain invested in the fund for at least three years. Moreover, these funds tend to perform better after the lock-in period.

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.

  • Track Record:

    While investing in tax saving sip schemes look for fund houses with consistent performance over a period of time, ideally more than five years. It is critical to evaluate the fund's stock quality and performance.
  • Returns Analysis:

    Besides comparing a fund's return to its benchmark, consider how it performs compared to competitors. Make investment selections based on a detailed analysis of long-term returns.
  • Expense Efficiency:

    Usually, experienced professionals manage the ELSS mutual funds. The expense ratio represents the cost of operating the fund. Lower costs enhance the overall returns.
  • Portfolio Turnover:

    It measures the time a fund manager takes to buy and sell the stocks in a portfolio. Low turnover implies a more cautious strategy, whereas high turnover indicates quick portfolio revisions.

Features of Tax Saving Mutual Funds

Here are the key features of ELSS funds.

  1. Minimum Lock-In Period: This is the only Section 80C investment with a shorter lock-in term of three years.
  2. 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.
  3. Low Investment Requirement: Investors can start investing in ELSS with a minimum of Rs. 500. So, you can get tax saving on SIP.
  4. 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.
  5. 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.
  6. 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 PlansReturns RangeLock-in PeriodTax Implications
Tax Saving or ELSS Funds15% to 18%3 yearsInvestments are tax-free, and tax deductions are available on capital gains.
Public Provident Fund (PPF)7% to 8%15 yearsTaxes are not levied on returns, and tax deduction are available on investments.
National Pension System (NPS)8% to 10%Till RetirementYou get a tax deduction on investments, but the returns are partially taxable.
Tax Saving Fixed Deposits Usually varies with different banks5 yearsTax deductions are applicable on investments. Returns are taxable if interests are more than Rs 10,000.
National Savings Certificate (NSC)7% to 8%5 yearsTaxes 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.

  1. 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. 
  2. Transparency: These funds regularly update the investors with scheme information disclosing its performance and market value. Allowing investors to easily track their portfolio. 
  3. 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. 
  4. 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. 

  1. 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. 
  2. Market Risk: It is 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.

FAQs on Tax Saving Mutual Funds

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.