So many people complain about how they have had to remain content with moderate returns while trying to save their money on taxes. During financial planning, we often find it difficult to enlist investment options that create wealth while serving as useful tax-saving tools.
However, some equity-linked tax savings schemes (ELSS) have effectively served the dual goal of wealth creation and tax savings. Since ELSS funds come with the mandated three-year lock-in period, we have enlisted below some of them that have yielded returns both on one-time payment and through Systematic Investment Plans (SIPs) over the period.
| Mutual Funds | Three-year Returns
(in %) | Assets under Management
(in ₹crores) |
| SBI Tax Advantage Fund Series III Direct Growth | 37.5 | 29.31 |
| Quant Tax Plan Growth | 36.36 | 855.21 |
| SBI Long Term Advantage Fund Series IV Direct Plan Growth | 35.23 | 179.00 |
| SBI Tax Advantage Fund Series II Growth | 34.55 | 6,43,285 |
| BOI AXA Tax Advantage Fund Regular Growth | 29.79 | 2,798 |
| BOI AXA Midcap Tax Fund Series I Direct Growth | 29.49 | 66.00 |
| SBI Long Term Advantage Fund Series III Direct Plan Growth | 29.08 | 64.25 |
| Mirae Asset Tax Saver Fund (G) | 20.2 | 30.117 |
What are ELSS funds?
For those new to investing, ELSS funds are open-ended equity mutual funds that have a major part up to 80 per cent of their portfolios invested in equity stocks and related instruments. The rest of the money is invested in debt funds and market-linked instruments. These funds, unlike other equity funds, are a special category of mutual funds bought mostly to qualify for tax deductions under Section 80C of the Income Tax Act. This explains why many investors perceive them as tax-saving mutual funds. Besides, these funds are best for those with long-term financial goals like creating a huge corpus or retirement planning or those intending to pay for their house in a lump sum.
How do ELSS funds help to save on taxes?
Investing in some of the best ELSS funds can help you save up to ₹46,800 every year in taxes while earning you market-linked returns. Among most other investment options listed under Section 80C, the lock-in period of three years in ELSS funds is the shortest. Also, these tax-saving options have a higher potential to earn more returns than all other tax-savings tools. However, you must note that the stock market’s performance has a direct bearing on the funds’ growth and performance.
Many people make the blunder of investing in ELSS funds at the end of the financial year to save on taxes. While this may be deemed as a good tax-planning strategy, parking money in these funds only to save on the tax outflow is a financially wrong move. While you may consider seriously the idea of tax planning, do not discount the need to focus on long-term wealth creation. Tax savings must not be the primary reason for investing in these funds.
Note: Mutual fund investments are subject to market risk. This is not investment advice. Please speak to a registered investment advisor before investing.