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Tax saving with mutual funds

Tax Saving Under Section 80C: ELSS Funds to Boost Savings

Tax Saving can be quite an issue for many; especially if you reside in one of the fastest-growing economies of the world. Living in India is a pocket-friendly affair compared to some hefty economies! The average cost of living here rings in at around Rs. 31,500, which is a fraction of the expenses in the United States, where it climbs up to around Rs. 1,81,000.

For families, monthly expenses in India hover around Rs. 75,500, significantly lower than in the U.S., while the after-tax salary stands at around Rs. 39,600, which pales in comparison to the States. And if we peek at France, well, it’s about 1.4 times pricier than the Indian scene!  

India’s really stepping up its game in Asia’s financial scene and on the global economic stage. It’s eyeing a major role in the big leagues. But let’s face it, taxes can be a bit of a headache, especially when the economy’s shifting gears faster than you can say “change”. Handling those tax matters remains a real challenge for many in this rapid change.

Now, let’s dive into a fun analogy: Suppose you’re playing a fantasy combat game named “Taxopia”. You airdrop there with your financial baggage, but you must arm yourself with the right gear before a casualty strikes. Just when you’re searching for arms, you spot this magical corner called “Section 80 C Kingdom”. The twist is that if you find the Tax Saver Gem there, you become immune to the tax monsters.

Just like the excitement of navigating Taxopia, Section 80C isn’t a snooze-fest; it’s a real-life win-win situation. It’s the gear you need in your financial adventures to tackle the tax monsters and come out on top. 
 
Now, let’s break away from the usual and hop onto the Bullsmart Express for a different kind of ride! 
In the realm of financial rules, the law keeps a close eye on all that’s happening. So, when it comes to tax savings, it’s all neatly bundled under “Section 80 C” of the Income Tax Act in India. This section allows for a maximum deduction of up to 1.5 lakh/year from an investor’s total taxable income. It’s like having a smart ticket to ride through the financial landscape with ease. 
 
Prior to commencing, here are a few things you should learn about: 
To be noted: the tax exemptions under this clause are applicable solely to individual taxpayers and Hindu undivided families.  
Who’s exempt? Corporate bodies, partnership firms, and other businesses. 

What is it about “saving taxes”?

Efficient tax savings provide individuals with increased financial flexibility and resources. By strategically managing tax liabilities, one can optimize resources for future investments, financial goals, and unforeseen circumstances. It’s a prudent financial practice that fosters stability and empowers individuals to make informed and strategic decisions. 

Check Tax Regime Specific to Mutual Fund Investors In India.
 
The buzz question is; how does one bring this clause to their use to save taxes?? 
Over 10 instruments are available under Section 80 C, offering varied benefits. Depending upon one’s requirements in terms of risk profile, interest/return, returns, and lock-in period. 

A rational planning of investments ensures their needs can be pursued through options like NSC (National Savings Certificate), PPF (Public Provident Fund), ULIP (Unit Linked Insurance Plan), ELSS (Equity Linked Savings Scheme), etc., empowering an individual to claim deductions up to Rs. 1,50,000 by tax benefits under Section 80 C. 

Comparison of Few Tax Saving Instruments: 

ParameterMarket LinkedFixed IncomeHybrid
 ELSSULIPPPFNSCBank FDNPS
Lock-in Period3 years5 years15 Years5 Years5 YearsTill Retirement
Minimum AmountRs 500as per normsRs 500Rs 100as per normsRs 500
Maximum AmountNo LimitNo LimitRs 1,50,000No LimitNo LimitNo Limit
Tax BenefitsRs 1,50,000Rs 1,50,000Rs 1,50,000Rs 1,50,000Rs 1,50,000Rs 50,000
Avg ReturnsMarket Linked Market Linked6%-8%7%-8%6.5%- 8%8%–10%
[In the table above:
Avg returns are an estimate, over 15 years (as of March 2021), based on available data. (Only for illustration purposes.)]

ELSS: Equity-Linked Savings Scheme;

ELSS is a category of mutual fund that invests 100% of the funds in ELSS investments are subject to market risks. Hence suitable for investors with high risk appetite and understanding of such investments. 
While each section 80C instrument offers its own sets of benefits, the ELSS stands out with the briefest lock-in period, I.e., of 3 years. If an investor prefers not to commit to a longer duration, the ELSS makes for an optimal choice. The potential to generate returns is highest in ELSS mutual funds.
  
But, before you invest in these funds, here’s what you should put on your checklist: 

Scheme performance: Do some research on the performance of the stocks in the last 10 years and compare them with the benchmark and category average. This historical research can help decide if it’ll be a good idea to invest. However, past performance should not be the only factor in choosing a scheme, as it does not guarantee similar future returns. 
 
Investment + tax planning: While the ELSS stocks are unique for combining equity market investments with tax benefits, it’s crucial not to view them solely as a “tax-saving” tool. Ensure that your investments align with your broader financial goals. Think of it as a blend of investment and tax-planning strategies.  
 
Always have a plan: Marching into the world of investments aimlessly isn’t advisable at all. Create a comprehensive investment plan, tailored to your financial goals. While ELSS can play a significant role in tax planning, it can also contribute to achieving long-term objectives. Mutual funds enlighten the path to goal planning and execution.
 
Thenceforth, in the dynamic landscape of finance, tax saving become a strategic tool. In the quest for optimal tax planning, the ELSS emerges as a stand-out choice, offering the advantage of the shortest lock-in period of just 3 years.

This flexibility makes it an ideal possibility for those who prefer a shorter commitment. In essence, Section 80C not only eases tax savings but also promotes prudent financial practices. An investor is ideally recommended to go through in-depth research into the features, benefits restrictions, and history to assess the investment scenario in a clearer way.

Fun Fact as a Bottom Line

ELSS funds not only save taxes but have the shortest lock-in period among tax-saving investments. So, plan well, invest smartly, and let your investments not only save taxes but also grow your wealth.

FAQs

  • Do mutual funds reduce taxable income? 

    Investing in mutual funds might offer some tax benefits, but they don’t directly reduce your taxable income. However, certain types of mutual funds like Equity Linked Savings Schemes (ELSS) under Section 80C can in tax deductions up to a specified limit. 

  • How do I avoid tax on mutual funds? 

    To minimize taxes on mutual funds, consider strategies like investing in tax-saving funds (ELSS), holding onto investments for the long term to qualify for lower capital gains taxes, or exploring tax-efficient funds. Consulting a tax advisor can provide tailored advice based on your situation.

  • What is the tax limit for mutual funds?

    The tax limit for mutual funds varies based on the type of fund and the duration of your investment. Short-term gains are typically taxed at a higher rate than longer-term gains. Specific limits and rates change as per the prevailing tax laws, so it’s advisable to stay updated or seek professional advice. 

  • Are mutual funds under 80C tax saver? 

    Yes, some mutual funds, particularly ELSS, fall under Section 80C for tax-saving purposes. Investments in these funds qualify for deductions within the overall limit specified under Section 80C of the Income Tax Act. Always verify with a tax consultant to understand the eligibility criteria and the current tax-saving options available under 80C. 

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