Save Tax by Investing Mutual Fund

Mutual funds, also termed as ELSS (Equity Linked Savings Scheme), are one of the greatest tax-saving instruments provided under the provision of section 80C of the Income Tax Act, 1961. Further, the said section permits the investor to claim benefits from his/ her taxable income if he/ she had put their money into certain investments.

In this blog, we will discuss the concept of the Equity Linked Savings Scheme and how can one save tax by Mutual Fund?

Concept of Equity Linked Savings Scheme

ELSS or Equity Linked Savings Scheme is an equity oriented mutual fund scheme qualified for tax deductions under the provisions of the Income Tax Act 1961. 

ELSS mutual funds are open-ended equity oriented schemes that invest principally in the shares of domestic companies and generate growth through capital appreciation for investors. 

Further, the returns received from ELSS funds are directly linked to the stock market performance. Furthermore, to benefit from the tax subsidies, one needs to invest in the ELSS funds for a minimum period of three years.

Also, the concept of Equity Linked Savings Scheme Funds can be categorized into as follows:

Growth Option

Equity Linked Savings Scheme growth option can assist with wealth creation. That means the investor receives the full amount of redemption as a lump sum at the time of maturity.

Dividend Option

Equity Linked Savings Scheme’s dividend option provide investors dividend income by way of the course of the scheme. That means as an investor, one can choose to have pay-outs whenever the fund affirms dividends, or one could take to reinvest them.

Tax Benefits of Investing in Equity Linked Savings Scheme

ELSS or Equity Linked Savings Scheme mutual funds permit the investor to save tax under the provisions of Section 80C of the Income Tax Act 1961. 

Further, it shall be noted that investments of up to Rs 150000 are qualified for the annual tax deductions. Even though one can invest more, however, any excess amount will not be eligible for deductions.

Furthermore, the returns generated from the ELSS funds incur long term capital gains tax at a rate of 10 percent if the total amount of the long term capital gains from the equity oriented mutual funds or equity shares are higher than Rs 100000 in a year. 

That means if a person opts for the dividend option, then, in that case, dividends shall become taxable in the hands of investors and the mutual funds will deduct TDS (Tax Deducted at Source) @10% for the resident investor and @20% (plus the applicable surcharge and cess) for the non-resident investors before pay-outs. 

However, it shall be noted that an investor can claim a tax credit of the TDS deducted at the time of submitting their annual returns.

Notwithstanding this, the ELSS funds can be termed as one of the best tax-saving investment options, because of their lower  lock-in period and high return probability, as compared to other alternatives.

Benefits of Equity Linked Savings Scheme

The top benefits of the Equity Linked Savings Scheme are as follows:

  1. Equity Linked Savings Scheme funds are the only available tax-saving funds within the limit of Rs 1.5 lakhs, which has the extra advantage of providing equity-linked returns;
  2. Investing into an ELSS permits the investor to have dual benefits, such as to get capital appreciation and tax benefits;
  3. Equity Linked Savings Scheme has the shortest tenure as the lock-in period, i.e., of three years, when compared to any other tax-saving instruments, such as PPF and NSC;
  4. Since they are linked to the equity market, Equity Linked Savings Scheme funds can bring in good returns over the long-term, particularly if reserved even after the lock-in period is over;
  5. Good investment funds are for those who have moderate to high risk appetite;
  6. Dividends received from the Equity Linked Savings Scheme funds are tax-free during the investment period;
  7. Profits earned from the sale of ELSS fund units are termed as long-term capital gains and therefore, are tax free;

How to Invest in Equity Linked Savings Scheme?

The best way of investing into an Equity Linked Savings Scheme mutual funds is by way of monthly Systematic Investment Plan (SIPs). Further, the minimum investment required for a SIP can be as small as Rs. 500 per month.

At the commencement of every year, work-out the statutory deductions and compute what one has left over from the Rs. 1.5 lakhs limit. Divide the amount by 12 to decide the SIP amount.

How to Select an Equity Linked Savings Scheme?

Once the investor has decided between the dividend and growth option, reliant on his/ her goals, assessment of different schemes and plans based on their historical performance. However, this is not an assurance for any future performance, and the same can be a fair indicator. Similarly, check for the consistency of returns. 

Further, the other criteria to consider will be age and fund size. A larger fund supporting over a period of time specifies higher trust amongst investors.

However, one must also check other indicators and pointers to select a fund most in line with the financial objects rather than going in flow with the market trend.


In a nutshell, Equity Linked Savings Schemes (ELSS) can be one of the best options that could assist a person in building wealth that, too, with saving of taxes. 

However, it shall be noted that just like any other investment option, one must do his/ her research, assess his/ her financial goals, and ensure that he/ she knows the features before going into all this.

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