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How to Save Tax by Investing in Mutual Fund

Investing in mutual funds can be a great way to save tax. Mutual funds are an investment vehicle that pools money from many investors and invests it into stocks, bonds, or other securities. By investing in mutual funds, you can diversify your investments while minimizing risk. In addition, the taxes you pay on your investments can be reduced depending on the type of mutual fund you choose. This guide will explain what types of mutual funds are available and how they can help you save taxes when investing. It will also provide tips for maximizing your returns and reducing risk when investing in mutual funds. With this knowledge, you can make more informed decisions about your investments and enjoy greater financial freedom as a result. Ready to get started? Let’s dive in!

tax mutual funds ELSS

What are the Best Tax-Saving Mutual Funds?

When it comes to tax-saving mutual funds, there are many options available. Each type of fund has its own benefits and drawbacks, so choosing the right one will depend on your financial goals. Generally speaking, ELSS or Equity Linked Savings Scheme funds are one of the most popular tax-saving mutual funds. These funds invest mainly in equities, making them a high-risk but potentially rewarding choice.

Tax Benefits of Investing in ELSS

Investing in ELSS mutual funds can help you save tax under Section 80C of the Income Tax Act, 1961. You can claim annual tax deductions for investments up to Rs. 1,50,000. However, investments exceeding this amount will not be eligible for deductions.

If your total long-term capital gains from equity-oriented mutual funds or equity shares exceed ₹1,00,000 in a year, you will be subject to a 10% long-term capital gains tax on the returns generated from ELSS funds. If you choose the dividend option, the dividends you receive will be taxable, and the mutual fund will deduct TDS at a rate of 10% for resident investors and 20% (plus applicable surcharge and cess) for non-resident investors. However, when filing their annual returns, investors can claim a tax credit for the TDS deducted.

Therefore, ELSS funds can be considered as one of the best tax-saving investment options due to their high return probability and shorter lock-in period compared to other alternatives.

Things to Consider While Investing in ELSS

Goal Setting:

Before investing in ELSS, setting your goals and determining the right asset allocation is important. Do you want to invest for a short period, or are you looking at long-term investments? Answering these questions will help you decide on the right investment option.

Risk Tolerance:

While investing in mutual funds, it is important to consider your risk tolerance level. Mutual funds come with different risk profiles and returns, so make sure that you choose one which suits your needs and financial objectives.

Low Expense Ratio:

Mutual funds often have high expense ratios due to their management fees and other charges. It is important to look for a fund with a low expense ratio to maximize your returns.

Investment Period:

When investing in ELSS, it is important to consider the lock-in period of the fund. Generally speaking, ELSS funds have a three-year lock-in period, meaning you cannot redeem or sell your investment until the completion of this time frame.

How to Choose an ELSS Fund?


Do your research and familiarize yourself with the various ELSS funds available in the market. Read their performance history, expense ratio, and risk profile to better understand which will suit your needs best.

Compare Funds:

Compare different funds’ returns, expenses, and other factors before making a decision. Also, consider the past performance of different funds to get an idea of how they are likely to perform in the future.

Invest Wisely:

Once you have decided on a fund, begin by investing small amounts at regular intervals over a period of time. This is known as rupee cost averaging and can help minimize losses due to market fluctuations while maximizing returns from your investments.

The Bottom Line

By investing in ELSS funds, you can enjoy the benefits of tax savings while making potentially rewarding investments. Make sure to do your research before choosing a fund, and invest wisely to maximize returns on your investments. With the right strategy and disciplined approach, you can maximize your investment in ELSS funds. Good luck!

Shitanshu Kapadia
Shitanshu Kapadia
Hi, I am Shitanshu founder of moneyexcel.com. I am engaged in blogging & Digital Marketing for 10 years. The purpose of this blog is to share my experience, knowledge and help people in managing money. Please note that the views expressed on this Blog are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment , tax, financial advice or legal opinion. Please consult a qualified financial planner and do your own due diligence before making any investment decision.