Tax saving is an integral part of our yearly financial planning. Under Sec 80C of the income tax act, we can claim deductions from our taxable income by investing in tax saving mutual funds or Equity Linked Savings Scheme (ELSS). Investing in mutual funds is the most common method of saving on tax. Investing in these diversified equity funds, one can save tax and enjoy the benefits of capital appreciation and also be sure that they would get back the money spent.
- How do tax saving mutual funds work
When an investor is investing money in a mutual fund, it gets added to a large pool of funds. This larger amount is then invested in the equity market in a manner which ensures that even if one investment goes through a loss, the other investments will be able to mitigate it thereby, keeping the investor’s money safe.
- The lock period
Mutual funds come with a lock period of three years. It means that you cannot withdraw the money before a period of three years. Other investments plans have a lock in period expanding from 6 to 15 years which is a larger term compared to mutual funds.
- Types of ELSS
The mutual funds offer two types of schemes, i.e., the dividend scheme and the growth scheme. In the former case if the fund announces a dividend then the investors are entitled to an extra income based on those dividends. These dividends do not fall under the lock period nor are subjected to any tax. They can be withdrawn or reinvested with the eligibility of tax benefits. In a growth scheme however such benefits are not provided.
- Some salient features
- The lower limit for investment is as low as Rs 500, and there is no upper limit to the money you wish to invest.
- An investor is eligible to a tax benefit of Rs 1.5 lakhs.
- The long term capital benefits availed from the investment is not taxed.
- Investors can use this platform to plan for future expenses like paying the down payment for a house or buying a car or going out on an expensive holiday.
- Investors do not need to invest the whole amount at a go. Investments can be made using a systematic investment plan (SIP).
- The investment of funds is done in a diversified manner and not at one place. This minimises the risk of massive losses.
- Dividends can be withdrawn even during the lock in periods without affecting your tax benefits.
- The funds provide nomination facilities to the investor.
This is an overview of how the tax saving mutual funds work. Investors must invest their money cautiously, as the funds are not beyond risks. All mutual fund investments are stock market investments and all risks pertaining to equity investments apply to it as well. Do study the market conditions properly before investing.