Tax planning is a crucial part of personal finance management, with the right investment to save taxes and grow wealth. Among many investment options, mutual funds are one of the most popular investment tools available to Indian taxpayers. They are fund pools together to invest in a diversified set of assets on behalf of investors. However, these investments are eligible for deduction under Section 80C of the Income Tax Act.
In this blog, we will take you through how mutual funds under 80C work.
What is Section 80C?
Section 80C of the Income Tax Act 1961 was introduced through the Finance Act of 2005. The objective of this section is to give taxpayers an option for deductions on their total income on account of their expenditures and investment gains to reduce their tax liability. Under this section, you can get a deduction up to ₹1.5 lakhs per financial year.
Does a Mutual Fund come under 80C?
All types of mutual funds offer some tax benefits. However, mutual funds under 80C only apply to ELSS (equity-linked savings schemes) to be eligible for deductions. It allows you to get a tax deduction up to ₹1,50,000 in a financial year, which can save you an amount up to ₹46,800 annually.
What are ELSS Mutual Funds?
An ELSS mutual fund is a tax-saving scheme that primarily invests in equities or equity-related instruments. As per SEBI regulations, mutual fund investments in equities consist of 80% of the total corpus in equity or equity-related assets. But, a lot of ELSS mutual funds have invested more than 98% of the total corpus in equities.
It has a mandatory lock-in period of three years. Many investors choose ELSS schemes to avail of tax benefits. If you invest in ELSS, then you can get tax benefits on the invested amount up to ₹1,50,000. Note that income generated under this scheme is considered as long-term capital gains (LTCG), taxed at 10% in case the income is above ₹1,00,000.
Types of ELSS
Though all types of ELSS funds have a common goal of tax-saving, characterised based on investment style, two broad types of funds targeting dividends and growth ELSS are as follows:
- Growth Funds: This type of ELSS scheme helps investors create long-term wealth. Returns are reinvested, and investors receive capital appreciation at the time of redemption. You can get the entire amount after the funds are sold.
- Dividend Funds: There are two types of dividend funds, namely dividend payouts and dividend reinvestments. If an investor picks a dividend payout, they will receive tax-free dividends. And if they go for the dividend reinvestment option, dividends will be reinvested into a new investment.
Best ELSS Mutual Funds
The following table lists the best ELSS mutual funds available in India.
| Name | 3-Year CAGR | 5-Year CAGR | Rating |
| SBI Long Term Equity Fund Direct Plan Growth | 25.01% | 30.34% | 5 star |
| Motilal Oswal ELSS Tax Saver Fund Direct Growth | 24.09% | 28.38% | 5 star |
| Mirae Asset Tax Saver Fund | 25.51% | 21.15% | 5 star |
| BOI Axa Advantage | 29.21% | 20.37% | 5 star |
| ITI ELSS Tax Saver Fund Direct Growth | 21.84% | 30.54% | 4 star |
| IDFC Tax Advantage ELSS Fund | 25.75% | 19.10% | 4 star |
| Kotak Tax Save Fund | 22.24% | 16.40% | 4 star |
| HDFC ELSS Tax Saver Direct Plan Growth | 21.84% | 30.54% | 4 star |
| JM ELSS Tax Saver Fund Direct Plan Growth | 20.04% | 28.12% | 4 star |
| UTI Long-term Equity Fund | 22.06% | 15.69% | 4 star |
| DSP Tax Saver Fund | 24.08% | 16.73% | 4 star |
Conclusion
Mutual funds under 80C under the ELSS scheme are a popular investment for investors that help them save taxes and accumulate wealth. The lock-in period in ELSS is the shortest, and it encourages people to invest in the long term.
Equity Linked Savings Scheme, as the name suggests, invests your funds in the equity market, offering market growth benefits with higher returns. If you are looking to optimise your tax saving, you may go with ELSS mutual funds to get the benefits of financial growth in the long run.
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