All about Tax Saver Mutual Funds


Tax Saver Mutual Funds are those mutual funds which are eligible to deduction under Section 80C. And as investment in these funds can be claimed as a deduction under Section 80C – these are popularly referred to as Tax Saver Mutual Funds.

There is no maximum limit on the amount which can be invested in Tax Saver Mutual Funds. However, the deduction under Section 80C would be limited to Rs. 1.5 Lakhs. This limit of Rs. 1.5 Lakhs under Section 80C is total deduction allowed for investments in various instruments like Tax Saver Mutual Funds, PPF, EPF etc.

These tax saver mutual funds can be kept either in demat form or in physical form and can either be purchased online or offline. These funds are issued at the prevailing Net Asset Value (NAV) at the time of purchase and also redeemed at the NAV prevailing at the time of redemption.

These tax saver mutual funds are issued by various fund houses and offer both the direct as well as regular plan.

Are all Funds considered as Tax Saver Mutual Funds?

No, all mutual funds are not considered as Tax Saver Mutual Funds. Only those funds which invest more than 65% of the amount in equities are considered as Tax Saver Mutual Funds.

These funds are also called as Equity Linked Saving Scheme (ELSS) as they invest a major chunk of the amount in equities. These words i.e. ELSS and Tax Saver Mutual Funds are many times used inter-changeably.

Before investing in any fund, the investor should check whether the funds qualify for deduction under Section 80C or not and then take a decision accordingly.

It is also important to note that Tax Saver Mutual Funds come with a lock-in period of 3 years. Once an amount is invested in these funds, the investor cannot withdraw the amount before 3 years. After 3 years, the investor is free to withdraw this amount from the mutual fund and use this for any purpose. However, there is no option to withdraw before 3 years.

This lock-in period of 3 years is only applicable for these ELSS Funds which classify as Tax Saver Mutual Funds. For all other types of funds which do not quality as Tax Saver Mutual Funds – there is no lock-in period and a person can withdraw the funds at any time at the prevailing market rates.

Procedure to withdraw from Tax Saver Mutual Funds

After completion of 3 years, the investor can withdraw the funds at any time by filing an application for redemption. The amount can either be redeemed in full or in part.

On redemption, the gains would be liable to tax @ 10% without indexation. This is a new change and is applicable from Financial Year 2018-19 onwards. This can be explained with the help of an example.

For eg: You invested Rs. 1 Lakhs in 2018 and you after 5 years i.e. in 2023, the value of this fund grows to Rs. 3 Lakhs. You redeem your investment and get Rs. 3 Lakhs.

Now, in the above scenario, the Rs. 1 Lakh which you invested qualifies as a deduction under Section 80C in the year 2018-19 and no tax would be levied on this amount.

However, the appreciation which you have earned of Rs. 2 Lakhs (i.e. Rs. 3 Lakhs – Rs. 1 Lakhs) would be liable to tax. Long Term Capital Gains Tax @ 10% would be levied on these gains. 10% of Rs. 2 Lakhs i.e. Rs. 20,000 would be payable when you redeem these gains.

Earlier the gains were also exempted from the levy of capital gains tax but with effect from Financial Year 2018-19, the gains are also now liable to tax.

Dividends from Tax Saver Mutual Funds

There are 2 types of funds:-

  1. Dividend Option: In this type of fund, regular dividend is declared and paid to the bank account of the investor.
  2. Growth Option: In this type of fund, the dividend earned is not declared but is reinvested. As the amount is reinvested, no amount is received in the bank account of the investor and gets reinvested which leads to higher NAV.

In both the above cases, no tax is levied on Dividends from Mutual Funds.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.