What are Tax Savings Mutual Funds: How do they work & Top 5 ELSS in India.



Tax Saving Mutual Funds, also known as Equity-Linked Savings Schemes (ELSS), are a type of mutual fund investment that offers tax benefits under Section 80C of the Income Tax Act in India. These funds are designed to help investors save on taxes while also providing exposure to the equity markets.


1. Tax Benefits:

Investments made in Tax Saving Mutual Funds are eligible for a deduction from taxable income under Section 80C of the Income Tax Act. As to the cutoff in September 2021, the maximum deduction allowed under this section is Rs. 1.5 lakh. This deduction helps in reducing the overall taxable income, leading to lower tax liability.

2. Equity Exposure:

Tax Saving Mutual Funds primarily invest in equities or stocks of various companies across different sectors. This equity exposure has the potential to generate higher returns over the long term compared to traditional tax-saving instruments like Fixed Deposits (FDs) or Public Provident Fund (PPF).

3. Lock-in Period:

One key feature of Tax Saving Mutual Funds is the lock-in period. The investments made in these funds come with a mandatory lock-in period of 3 years. This means that investors cannot redeem or sell their units before the completion of 3 years from the date of investment.

4. Market-Linked Returns:

Since these funds invest in equities, the returns are linked to the performance of the stock market. This implies that the returns can vary based on market conditions and the performance of the underlying companies in the fund portfolio.

5. Diversification:

Tax Saving Mutual Funds usually invest in a diversified portfolio of stocks, which helps spread the risk associated with investing in equities.

6. Liquidity after Lock-in: 

After the three-year lock-in period, investors have the flexibility to redeem their investments partially or fully as needed.


Top 5 Tax Saving Mutual Funds in India ranked by its last 5-year returns by ET Money 

Elss growth

1. Quant Tax Plan

AUM: ₹4049 Crs.

Current value: ₹12.73 lakh

Return: +30.66% p.a.


2. Mirae Asset Tax Saver Fund

AUM: ₹16,634 Crs.

Current value: ₹9.92 lakh

Return: +20.25%p.a.


3. Kotak Tax Saver Fund

AUM: ₹3855 Crs.

Current value: ₹9.86 lakhs

Return: +19.98%p.a.


4. DSP Tax Saver Fund

AUM: ₹11303 Crs.

Current value: ₹9.77 lakh

Return: +19.62% p.a.


5. Canara Robeco Equity Tax Saver Fund

AUM: ₹5750 Crs.

Current value: ₹9.68 lakh

Return: +19.22% p.a.

Yet is important to note that while Tax Saving Mutual Funds offer the potential for higher returns, they also come with higher market risks compared to traditional tax-saving instruments.

Investors should carefully consider their risk tolerance and investment horizon before investing in these funds.

Additionally, tax laws and regulations may vary by country, so it’s always advisable to consult with a financial advisor or tax professional before making any investment decisions.

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