Section 80C allows for deductions for investments in specified instruments and investing in Tax Saving Mutual Funds is one such specified instrument which can be claimed as a deduction under Section 80C at the time of filing of income tax return and the balance income after claiming all deductions and exemptions is taxable as per the income tax slab rates.

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What are Tax Saving Mutual Funds?

Tax Saving Mutual Funds are just like normal Mutual Funds which accept money from the public and then these Mutual Funds invest this money in Shares, Debentures and other investment forms on behalf the public. These Tax Saving Mutual Funds are also quoted at NAV’s which are updated on a daily basis. The NAV’s of all Tax Saving Mutual Funds have been updated in this link.

A major difference between a normal mutual fund and a tax saving mutual fund is that tax saving mutual funds should be equity oriented i.e. minimum 65% of their corpus should be invested in Equities (Shares). Therefore, these Tax saving Mutual Funds are also referred to as Equity Linked Savings Scheme (ELSS).

Moreover, these tax saving mutual funds also come with a lock-in period of 3 years. Under no-circumstance can these mutual funds be redeemed before the expiry of 3 years.

Should you be investing in Tax Saving Mutual Funds?

While making any investment, an investor should consider not only the tax benefits but various other factors as well like potential return from that investment, risk appetite of the investor etc. As these Tax Saving Mutual Funds invest in Shares, the return from this investment is not guaranteed and also varies from year to year. If its return in the past has been good, it is also not necessary that it will perform good in the future as well.

For investors who are risk-averse and prefer safe tax saving investment options, investing in PPF Account and Tax Saving Fixed Deposits are a good option as these are not only tax saving but also give a guaranteed return which is informed before making the investment.

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For investors who have risk taking ability, tax saving mutual funds is advisable as their potential to earn return is higher than PPF or Tax Saving Fixed Deposit. The only drawback of Tax Saving Mutual Funds is that they don’t guarantee a fixed return.

However, there are some other benefits as well of investing in tax saving mutual funds like:-

  1. Lock-in period is only 3 years which is the least for any investment allowed to be claimed as deduction under Section 80C
  2. The Dividend received from these Mutual Funds is tax free in the hands of the investor
  3. Moreover, the Capital Gains arising on sale of Mutual Funds is also tax-free in case the investment is held for more than 1 year.