The time has come to give information about your earnings to the government. Yes, every employed person is now trying to find some way or the other to show off his investments and get rid of paying taxes. This tax reduces the savings of common people. However, tax saving should be a part of every person's financial planning. Tax saving options are available in the market. Which includes PPF, National Savings Certificate i.e. NSC, Tax Saving FD, Equity-Linked Saving Scheme etc.
However, among these tax saving options, Equity-Linked Saving Scheme (ELSS), also known as Tax Saving Mutual Fund, has gained a lot of popularity among taxpayers in the last decade. Along with individuals, HUFs can also invest in ELSS or tax saving mutual funds and claim tax benefits.
SEBI defines tax saving mutual funds as open-ended equity schemes that come with a lock-in period and tax benefits. These funds invest a minimum of 80 per cent of their assets in equity and equity-related instruments and have the flexibility to invest across sectors and market cap spectrum. Let us also tell you why tax saving mutual is better than other options like PPF, National Saving Certificate i.e. NSC, tax saving FD…
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Short lock-in period
ELSS or Tax Saving Mutual Funds come with a mandatory lock-in period of 3 years which is the lowest compared to other tax-saving instruments. This means that you can withdraw your money after completion of 3 years from the date of investment in tax saving mutual fund. The lock-in period of both National Savings Certificate and Tax Saving FD is 5 years. On the other hand, contributions to the Public Provident Fund (PPF) are locked-in for 15 years, while contributions to the National Pension System (NPS) remain locked-in till the age of 60 years. In such a situation, your money does not remain locked in tax saving mutual funds for long and due to less time, you can easily withdraw it.
generate strong income
Being equity-oriented, ELSS or tax saving mutual has the potential to provide higher returns to its investors compared to non-market linked tax-saving options. Specifically, RBI has increased the repo rate to increase economic growth. Due to which interest rates on non-market-linked tax saving schemes like Tax Saver Bank FD, PPF and NSC are currently at the lowest level in many years. Tax saving mutual funds invest in different types of stocks/sectors/market caps depending on the market conditions to grow investors' wealth and try to give maximum returns in minimum period of time.
Tax benefit under section 80C
Unlike other equity-oriented schemes, ELSS or tax saving mutual funds also offer tax saving benefits to their investors. Investment of up to Rs 1.5 lakh in ELSS during a financial year is eligible for deduction under Section 80C of the Income Tax Act. Investors in the highest tax bracket can effectively save up to Rs 48,600 in total tax liability by investing in tax saving mutual funds. The thing to note is that even if you save in any tax saving mutual fund or make other tax saving investments, there is no limit, but under Section 80C, you can get tax saving benefit only up to Rs 1.5 lakh. will be.
Less impact of market fluctuations
Tax saving mutual funds also depend a lot on the performance of the stock market. People who invest in the stock market look at the stability of the market and withdraw the money after some volatility. But tax saving mutual funds try to protect investors from this cycle of stability and instability. Due to the lock-in period of 3 years, no investor is able to withdraw money and during this time, the instability of the stock market gets lost. In such a situation, it helps in increasing your investment compounded.
Most importantly, you also get the facility of SIP i.e. Systematic Investment Plan in tax saving mutual funds. Investing in ELSS through SIP route can be done with a small investment amount of as low as Rs 500. Investing through SIP can reduce the impact of volatility on your portfolio with the integral rupee-cost averaging feature and, in turn, potentially add to your wealth. Additionally, it develops a disciplined approach to investing, which is essential to achieve better returns from your mutual funds.
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