How to save tax under Section 80C by mutual funds

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Income and expenditure are two sides of same coin. Tax savings investments allow you to save on tax as well as increase your saving. Tax saving mutual fund schemes is one of tax saving investments. Want to save tax and try to grow your savings at same time? Enjoy dual benefit of saving tax as well as long term growth by investing into mutual funds. Let us understand investment in mutual fund where tax can be saved under Section 80C.

What is an ELSS scheme or how much can you invest in them?

Investment in certain mutual funds for tax saving purpose is called equity linked saving schemes which qualifies for section 80C deduction. Equity-linked saving schemes offer option to save tax. These funds invest in equities and you can choose from either dividend or growth option. You can invest any amount up to 1.5 lakh in ELSS to save tax.

As such schemes invest in equities, they give you opportunity to earn higher returns over long run. However, with all mutual fund schemes, there is no guarantee of any fixed returns. Opting for an ELSS means huge portion of your investments will be in equity and that may not be what you want. Check Top 5 Diversified Mutual Funds

Why should one invest in an ELSS scheme?

ELSS funds are one of best avenues to save tax under section 80C. Once you compliant KYC, you can invest in an ELSS scheme just like the way you do in any other mutual fund scheme. These investments can be done by filling relevant form and writing cheque through online fund house websites or through online portals. It is possible to invest using SIP or STP.

Advantages of ELSS over other tax saving instruments

Advantage of ELSS funds is that they come with lowest lock-in among all tax saving investment in just 3years. Apart from that, because of their equity exposure, ELSS funds are best placed to help you earn returns over long-term. Among all tax saving schemes, ELSS has shortest lock-in period of 3 years. Other tax saving products such as, tax-saving fixed deposits have 5 years lock-in period, NSC have lock-in periods of 5 years while PPF has lock-in period of 15 years.

Your investments in national pension scheme will stay locked-in till your retirement. If you opt for dividend option, you can get cash flow as well in ELSS schemes. Finally, in an ELSS scheme, you do not pay any tax on dividend or when you redeem units. You can also opt for SIP investments, which bring about discipline in regular investing.

What options do you have once lock-in period of three years?

You have option to continue to hold mutual fund units after three years or redeem them. Financial planners recommend ELSS as part of equity allocation and you can hold if it performs in line. ELSS is not for risk averse. As ELSS investments are stock market investments, all risks linked with equity investments pertain to ELSS. Also see How to file revised return online

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