Best Tax Saving Mutual Funds in 2023 – ELSS Funds
Tax saving mutual funds, also known as Equity Linked Saving Schemes (ELSS), is a popular investment option for taxpayers in India. These mutual funds not only offer potential long-term returns but also provide tax benefits under Section 80C of the Income Tax Act, 1961. With a wide range of tax-saving mutual funds available in the market, it can be challenging to choose the right one that suits your investment goals and risk appetite. In this article, we will explore the best tax saving mutual funds in India based on their performance, risk profile, and other factors.
Whether you are a beginner or an experienced investor, this article will provide you with valuable insights to help you make an informed investment decision and maximize your tax savings. So, let’s dive in and discover the best tax-saving mutual funds in India.
ELSS funds are mutual funds that invest at least 65% of their assets in equity and equity-related instruments, such as stocks, and are eligible for tax deductions under Section 80C of the Income Tax Act in India.
Investing in ELSS mutual funds can help investors save on taxes by allowing them to claim a tax deduction of up to INR 1.5 lakh per year on their investments. This can be especially useful for investors in the highest tax bracket, as it can help them reduce their tax liability significantly.
In addition to the tax benefits, ELSS funds also have the potential to generate higher returns compared to other tax-saving instruments, such as fixed deposits, PPF, and National Savings Certificates, as they are invested in the stock market.
How do Tax Saving Mutual Funds work?
Tax Saving Mutual Funds or ELSS funds are a type of mutual fund that invests at least 65% of its assets in equity and equity-related instruments, such as stocks. In India, ELSS funds are popular for their tax-saving benefits, as they are eligible for deductions under Section 80C of the Income Tax Act.
Here’s how Tax Saving Mutual Funds or ELSS Mutual funds work in India:
- Investment: Investors can invest in ELSS mutual funds through a one-time lump-sum payment or through a systematic investment plan (SIP), in which the investor makes regular, smaller investments over a period of time.
- Tax benefits: Investors can claim a deduction of up to INR 1.5 lakh per year on their investments in ELSS mutual funds under Section 80C of the Income Tax Act. This can help reduce their tax liability and increase their net return on investment.
- Lock-in period: ELSS mutual funds have a mandatory lock-in period of three years, during which investors cannot withdraw their investments. This helps encourage long-term investing and helps prevent investors from withdrawing their money during market downturns.
- Dividend reinvestment: ELSS mutual funds have a mandatory dividend reinvestment option, which means that dividends paid by the fund are automatically reinvested back into the fund instead of being paid out to the investor in cash. This can help investors compound their returns over time.
- Redemption: After the three-year lock-in period, investors can redeem their investments in ELSS mutual funds by selling their shares back to the fund. The fund will pay the investor the current market value of the shares, minus any applicable fees or charges.
Taxation on Tax Saving Mutual Funds
Here’s a summary of the taxation on Tax Saving Mutual Funds or ELSS Mutual funds in India:
- Investment income: Investment income earned from ELSS funds, such as dividends, is tax-free in the hands of the investor.
- Capital gains: Capital gains from selling ELSS fund units are taxed at different rates depending on the holding period:
- If the holding period is less than one year, capital gains are taxed at the investor’s applicable tax rate.
- If the holding period is more than one year, capital gains are taxed at a rate of 10% if the income from capital gain tax is more than INR 100,000 in the particular financial year.
- Tax deductions: Investors can claim a deduction of up to INR 1.5 lakh per year on their investments in ELSS funds under Section 80C of the Income Tax Act. This can help reduce their tax liability and increase their net return on investment.
Pros and Cons of Tax Saving Mutual Funds (ELSS Funds) in India
Here are some pros and cons of Tax Saving Mutual Funds (ELSS funds) in India:
Pros:
- Tax benefits: One of the main advantages of Tax Saving Mutual Funds (ELSS funds) is the tax benefits they offer. Investors can claim a deduction of up to INR 1.5 lakh per year on their investments in ELSS funds under Section 80C of the Income Tax Act, which can help reduce their tax liability and increase their net return on investment.
- Potential for higher returns: Tax Saving Mutual Funds (ELSS funds) have the potential to generate higher returns compared to other tax-saving instruments, such as fixed deposits and National Savings Certificates, as they are invested in the stock market.
- Diversification: Tax Saving Mutual Funds (ELSS funds) can help investors diversify their portfolios by adding exposure to the stock market. However, it’s important to diversify investments by investing in a mix of ELSS and other types of mutual funds.
Cons:
- Higher risks: Tax Saving Mutual Funds (ELSS funds) carry higher risks compared to other tax-saving instruments, as they are subject to the fluctuations of the stock market. While they have the potential to generate higher returns, they can also potentially suffer losses. Investors should have a moderate to high-risk tolerance and be comfortable with the potential for short-term market volatility before investing in ELSS funds.
- Lock-in period: Tax Saving Mutual Funds (ELSS funds) have a mandatory lock-in period of three years, during which investors cannot withdraw their investments. This can be a disadvantage for investors who may need access to their money before the lock-in period is up.
- Dividend reinvestment: Tax Saving Mutual Funds (ELSS funds) have a mandatory dividend reinvestment option, which means that dividends paid by the fund are automatically reinvested back into the fund instead of being paid out to the investor in cash. This can be a good option for investors looking to compound their returns over time, but it can also result in higher tax liability on capital gains when the investor eventually sells their shares.
Who Should Invest in ELSS Mutual Funds?
Tax Saving Mutual Funds (ELSS Funds) can be a good option for investors who:
- Are in a high tax bracket: ELSS mutual funds can be especially beneficial for investors in the highest tax bracket, as they can claim a deduction of up to INR 1.5 lakh per year on their investments, which can significantly reduce their tax liability.
- Have a long-term investment horizon: ELSS mutual funds have a mandatory lock-in period of three years, during which investors cannot withdraw their investments. This can be a good option for investors who are planning for long-term goals, such as retirement or children’s education.
- Are comfortable with market risks: ELSS mutual funds carry higher risks compared to other tax-saving instruments, as they are subject to the fluctuations of the stock market. While they have the potential to generate higher returns, they can also potentially suffer losses. Investors should have a moderate to high-risk tolerance and be comfortable with the potential for short-term market volatility before investing in ELSS mutual funds.
- Want to diversify their portfolio: ELSS mutual funds can be a good option for investors looking to diversify their portfolio by adding exposure to the stock market. However, it’s important to diversify investments by investing in a mix of ELSS and other types of mutual funds.
Consider reading – Top 10 Best investment options in India.
How to invest in Tax Saving Mutual Funds (ELSS Funds)?
Here’s a step-by-step guide on how to invest in Tax Saving Mutual Funds (ELSS funds):
- Determine your financial goals and risk tolerance: Before investing in Tax Saving Mutual Funds or ELSS funds, it’s important to determine your financial goals and risk tolerance. ELSS funds carry higher risks compared to other tax-saving instruments, as they are subject to the fluctuations of the stock market. While they have the potential to generate higher returns, they can also potentially suffer losses. Investors should have a moderate to high-risk tolerance and be comfortable with the potential for short-term market volatility before investing in ELSS funds.
- Choose a mutual fund: There are several mutual fund companies in India that offer Tax Saving Mutual Funds. Investors can choose a mutual fund company based on factors such as the company’s reputation, the fund manager’s track record, the fund’s past performance, and the fund’s expense ratio. Investors can also consider investing in a mix of ELSS funds from different mutual fund companies to diversify their investments.
- Decide on an investment amount: Investors can invest in ELSS funds through a one-time lump-sum payment or through a systematic investment plan (SIP), in which the investor makes regular, smaller investments over a period of time. It’s important to determine an investment amount that is comfortable for the investor and fits within their overall financial plan.
- Open a mutual fund account: Investors will need to open a mutual fund account with the chosen mutual fund company to invest in ELSS funds. This typically involves filling out an application form and providing proof of identity, address, and income. Some mutual fund companies may also require the investor to complete a risk assessment questionnaire to determine their risk tolerance.
- Make the investment: Once the mutual fund account is open, investors can make their investment in ELSS funds by transferring money from their bank account to the mutual fund account. It’s important to note that Tax Saving Mutual Funds have a mandatory lock-in period of three years, during which investors cannot withdraw their investments.
SIP vs Lumpsum: Which is Better for ELSS Investment?
Investors can invest in Tax Saving Mutual Funds through a one-time lump-sum payment or through a systematic investment plan (SIP), in which the investor makes regular, smaller investments over a period of time. Both options have their own set of advantages and disadvantages, and the best option for an investor will depend on their specific financial situation and goals.
Here are some pros and cons of lump-sum vs SIP investments in ELSS funds:
Lump-sum investment:
Pros:
- Potential to benefit from market timing: By making a lump-sum investment, investors have the potential to benefit from market timing if they believe the market is currently undervalued and is likely to go up in the future.
- No need to commit to a regular investment schedule: With a lump-sum investment, investors don’t have to commit to a regular investment schedule, which can be convenient for those who may not have the discipline to make regular investments.
- Maturity at one go: The ELSS funds have a lock-in period of 3 years. Your investment in ELSS Mutual funds will mature after 3 years and one goes if you have done a lumpsum investment.
Cons:
- Risk of market timing: While there is the potential to benefit from market timing with a lump-sum investment, there is also the risk of making the wrong timing decision and potentially missing out on gains.
- Higher upfront cost: With a lump-sum investment, investors need to have the full amount available upfront, which may not be possible for those with limited funds.
SIP investment:
Pros:
- Cost averaging: With a SIP, investors can take advantage of cost averaging, which means that they are buying units at different prices over time, rather than all at once. This can help smooth out the effects of market fluctuations and potentially increase the investor’s overall return.
- Convenient and disciplined investing: With a SIP, investors can make regular, smaller investments over a period of time, which can be more convenient and help them develop a disciplined investing habit.
Cons:
- Potential to miss out on market timing: By making regular, smaller investments over a period of time, investors may miss out on the potential benefits of market timing if they believe the market is currently undervalued and is likely to go up in the future.
- Higher transaction costs: With a SIP, investors may incur higher transaction costs due to the frequency of the investments.
- Maturity happens sequentially: SIPs in ELSS mutual funds usually offer a minimum 3-year lock-in that matures sequentially.
Consider reading – Top 10 Best Mutual fund for SIP
List of Best Tax Saving Mutual Funds in India
Here is a list of the best Tax Saving Mutual Funds or ELSS Mutual Funds in India:
| Fund Name | 1Y Returns | Rating | Fund Size(in Cr) |
| Quant Tax Plan Fund | 23.30% | 5 | ₹2,327 |
| Parag Parikh Tax Saver Fund | 13.00% | 5 | ₹901 |
| Canara Robeco Equity Tax Saver Fund | 7.70% | 5 | ₹4,583 |
| Mirae Asset Tax Saver Fund | 7.90% | 5 | ₹14,255 |
| IDFC Tax Advantage (ELSS) Fund | 13.10% | 4 | ₹4,091 |
| Bank of India Tax Advantage Fund | 8.40% | 4 | ₹696 |
| PGIM India ELSS Tax Saver Fund | 13.70% | 4 | ₹454 |
| Kotak Tax Saver Fund | 15.70% | 4 | ₹3,163 |
| Union Long Term Equity Fund | 9.40% | 4 | ₹594 |
| HDFC tax saver fund | 14.4% | 2 | ₹787 |
| DSP Tax Saver Fund | 11.60% | 4 | ₹10,715 |
| ICICI Prudential Long Term Equity Fund | 9.40% | 4 | ₹10,564 |
| SBI Long Term Equity Fund | 15.20% | 3 | ₹12,092 |
| Mahindra Manulife ELSS Kar Bachat Yojana Fund | 11.00% | 3 | ₹534 |
| Franklin India Taxshield Fund | 12.80% | 3 | ₹5,096 |
| JM Tax Gain Fund | 7.90% | 3 | ₹74 |
ELSS vs PPF vs Tax Saver FD
Here is a quick comparison of ELSS vs PPF vs Tax Saver FD:
| Particulars | ELSS | PPF | Tax Saver FD |
| Investment Eligibility | Any Individual Taxpayer including NRI’s | Resident Indian individuals | Any Individual Taxpayer including NRIs and HUF |
| Investment Amount | Rs.500 up to No Upper Limit | Rs.500 up to Rs.1.5 lakh | Rs.100 to up to Rs.1.5 lakh |
| Lock-in-Period | 3 years | 15 years | 5 years |
| Tax on Returns | Tax-free(Upto INR 1 lakh per financial year) | Tax-free | Taxable(as per tax slab) |
| Expected Returns | 10% to 15% (market-related) | 6-7%(depends on PPF interest rate) | 5-7%(depends in bank FD rate) |
| Investment Option | Medium to Long Term | Long Term | Medium to Long Term |
| Loan Facility | No loan available. | Loan available after completion of 3 years | No loan available |
| Risk Factor | Risk associated | No Risk | No Risk |
| Tax Saving Benefit | Rs.1.5 lakh as specified under Section 80C of the Income Tax Act, 1961 | Rs.1.5 lakh as specified under Section 80C of the Income Tax Act, 1961 | Rs.1.5 lakh as specified under Section 80C of the Income Tax Act, 1961 |
FAQs on Tax Saving Mutual Funds
Is there a minimum investment requirement for ELSS Funds?
Yes, there is a minimum investment requirement for ELSS funds which is generally INR 500.
Should I invest in an ELSS in a lump sum or SIP?
Go for lumpsum investment if the market has corrected a lot. Go for SIP investment if you think the market will correct it in the future. The only difference you will notice in lumpsum or SIP investment is your maturity will happen at one go for lumpsum investment and for SIP it will be sequentially.
What is the maximum amount that can be invested in Tax Saving Mutual Funds?
There is no upper limit of investment in Tax Saving Mutual Funds but you will get tax benefits only for INR 1.5 lakhs for your tax saving purpose.
How much tax will I have to pay on my long-term capital gain?
The redemption proceeds of ELSS are not entirely tax-free. The long-term capital gains of up to Rs 1,00,000 a year are tax-free, and any gains above this limit attract a long-term capital gains tax at the rate of 10% plus applicable cess and surcharge.
Can I withdraw my investment in the ELSS fund during the lock-in period?
No, you can't withdraw your investment during the lock-in period. Once an investment is made in an ELSS, it cannot be withdrawn till the lock-in period is over.
Can an NRI invest in ELSS Mutual funds?
Yes, NRIs can also invest in tax saving mutual funds like ELSS.
