When you are seeking the best tax saving mutual funds in India, you should keep more than a few factors in mind. You can actually save taxes on mutual funds if you choose a suitable mutual fund plan and abide by the investment goals that you have set for yourself. Tax planning with mutual funds is always possible, provided you are careful enough to not compromise on your returns as well. Experts usually recommend ELSS or equity linked savings schemes for investors with a view towards saving considerably on taxes.
These are equity diversified mutual fund plans which are tied to equity markets. It is a mutual fund plan which will deploy investments or the investment corpus into equity-linked and equity based securities. ELSS comes with a 3-year lock-in period and hence you should keep money in these funds for this duration without withdrawing the same. The longer you keep your investment in the fund, the higher your chances of earning stellar returns over a sustained duration of time.
You can invest a maximum of Rs. 1.5 lakh in the best tax saving mutual funds in India, notably the ELSS. You will get this entire amount as deduction if you wish, under Section 80C of the Income Tax Act. This is one way in which mutual funds will help you save on taxes considerably. ELSS funds will invest at least 80% of their accumulate corpus in equity and equity linked market instruments. The fund will invest in equity through a diversified way, i.e. spread across varying market capitalization levels, sectors and themes. There is no maximum duration for investment. Income will be taken as LTCG and taxed as per the applicable tax rules and regulations. What makes ELSS a better choice than PPF or EPF is that the post-tax returns will be far superior. The LTCG will be zero taxable if it stays within Rs. 1 lakh in a particular financial year. Anything beyond this will be taxed at the rate of 10% of overall gains minus indexation. ELSS will help you get appreciation of capital while ensuring tax benefits simultaneously. They are the sole funds which have equity linked returns but are within the Section 80C limit of Rs. 1.5 lakh.
ELSS has the smallest lock-in period of three years in comparison to other instruments for saving taxes such as NSC and PPF among others. Since ELSS funds are linked to equity markets, they may offer good rewards over the long haul if you keep them intact post the lock-in period. They are suitable for people wishing to save on taxes while possessing a high to moderate appetite for risks. In the period of investment, dividends from these funds will remain completely tax-free as well. Profits from selling ELSS fund units will be taken as LTCG. You should look to invest via SIPs or systematic investment plans. The minimum investment may be as low as Rs. 500 every month or slightly higher. This is the best way to get the benefits of rupee cost averaging and spread out your risks.