Tax Saver Mutual Funds: A Comprehensive Guide for 2021

As the financial year comes to an end, taxpayers look for ways to save on taxes. One popular way to do this is by investing in tax saver mutual funds. Tax saver mutual funds, also known as Equity Linked Savings Scheme (ELSS), offer tax benefits under Section 80C of the Income Tax Act, 1961. In this blog, we will discuss the best tax saver mutual funds in India for the financial year 2021-22.

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  Mirae Asset Tax Saver Fund:

• This fund has consistently delivered high returns over the years and is a popular choice among investors. The fund has a diversified portfolio with investments in large-cap, mid-cap, and small-cap stocks. As of March 2021, the fund had assets under management (AUM) of over Rs 5,700 crore.

• Axis Long Term Equity Fund:

• This fund has a strong track record of delivering consistent returns and has been rated as a 5-star fund by Morningstar. The fund has a focus on large-cap stocks and has outperformed its benchmark over the years. As of March 2021, the fund had an AUM of over Rs 28,000 crore.

• Aditya Birla Sun Life Tax Relief 96 Fund:

• This fund has a mix of large-cap, mid-cap, and small-cap stocks in its portfolio. The fund has a track record of delivering high returns over the years and has been rated as a 5-star fund by Morningstar. As of March 2021, the fund had an AUM of over Rs 12,000 crore.

• ICICI Prudential Long Term Equity Fund:

• This fund has a focus on large-cap and mid-cap stocks and has consistently delivered high returns over the years. The fund has been rated as a 5-star fund by Morningstar and has an AUM of over Rs 8,000 crore as of March 2021.

• DSP Tax Saver Fund:

• This fund has a diversified portfolio with investments in large-cap, mid-cap, and small-cap stocks. The fund has a strong track record of delivering high returns over the years and has been rated as a 5-star fund by Morningstar. As of March 2021, the fund had an AUM of over Rs 6,000 crore.

What are Tax Saver Mutual Funds?

As mentioned earlier, tax saver mutual funds, also known as Equity Linked Savings Scheme (ELSS), are a type of mutual fund that offer tax benefits under Section 80C of the Income Tax Act, 1961. Investors can claim a deduction of up to Rs. 1.5 lakh per year from their taxable income by investing in these funds. The minimum lock-in period for these funds is three years, which means that investors cannot redeem their investment before the completion of three years.

Why invest in Tax Saver Mutual Funds?

Apart from the tax benefits, there are several other reasons why investors prefer to invest in tax saver mutual funds:

1. Potential for high returns: Tax saver mutual funds invest in the stock market, which has the potential to deliver high returns over the long term. Historically, equities have outperformed other asset classes such as fixed deposits and bonds.
2. Diversification: These funds have a diversified portfolio of stocks across various sectors and market capitalizations. This diversification helps to mitigate the risks associated with investing in individual stocks.
3. Professional Management: Tax saver mutual funds are managed by experienced fund managers who have expertise in stock picking and portfolio management. They conduct thorough research and analysis before making investment decisions.
4. Flexibility: Investors can start investing in these funds with a minimum investment of Rs. 500. Also, there is no upper limit on the investment amount.
5. Transparency: Mutual funds are regulated by the Securities and Exchange Board of India (SEBI), which ensures transparency in their operations. Investors can access information about the fund’s portfolio, performance, and expenses on the fund house’s website.

Things to consider before investing in Tax Saver Mutual Funds:

Before investing in tax saver mutual funds, investors should consider the following factors:

1. Risk appetite: Tax saver mutual funds invest in the stock market, which is subject to volatility and market risks. Therefore, investors should have a high-risk appetite and a long-term investment horizon.
2. Fund Performance: Investors should evaluate the fund’s past performance, its returns compared to its benchmark, and its consistency in delivering returns.
3. Fund Manager: The fund manager’s experience, track record, and investment philosophy are crucial factors to consider before investing in a fund.
4. Expense Ratio: The expense ratio of the fund is the annual fee charged by the fund house for managing the fund. Investors should compare the expense ratios of different funds and choose a fund with a reasonable expense ratio.

Types of Tax Saver Mutual Funds:

There are two types of tax saver mutual funds – dividend and growth. In the case of dividend funds, the investor receives regular payouts in the form of dividends. On the other hand, growth funds do not offer any payouts and the investor receives the entire amount, including capital gains, after the completion of the lock-in period.

Investors should consider their financial goals and tax implications before choosing between dividend and growth options. If the investor is looking for regular income, dividend funds may be a better option. However, if the investor is looking for long-term wealth creation, growth funds may be a more suitable choice.

Taxation of Tax Saver Mutual Funds:

Although tax saver mutual funds offer tax benefits, they are not entirely tax-free. The gains made from these funds are subject to taxation. If the investor redeems the investment before the completion of three years, the gains are treated as short-term capital gains and are taxed at the investor’s applicable tax rate. However, if the investor redeems the investment after the completion of three years, the gains are treated as long-term capital gains and are taxed at the rate of 10% on gains above Rs. 1 lakh.

Additionally, investors should also consider the tax implications of dividends received from these funds. Dividends are taxed at the rate of 10% (plus applicable surcharge and cess) in the hands of the investor.

Other Related Blogs: Section 144B Income Tax Act

Frequently Asked Questions (FAQs)

1. What is the lock-in period for tax saver mutual funds? The lock-in period for tax saver mutual funds is three years. Investors cannot redeem their investment before the completion of three years.
2. What is the maximum amount that can be invested in tax saver mutual funds? There is no upper limit on the investment amount in tax saver mutual funds. However, investors can claim a tax deduction of up to Rs. 1.5 lakh per year under Section 80C of the Income Tax Act, 1961.
3. Are tax saver mutual funds risky? Tax saver mutual funds invest in the stock market, which is subject to market risks and volatility. Therefore, these funds are considered to be relatively risky. However, diversification and professional management can help to mitigate these risks.
4. Can investors switch between tax saver mutual funds? Yes, investors can switch between tax saver mutual funds. However, if the switch is made before the completion of three years, the new investment will be subject to a fresh three-year lock-in period.
5. Can investors redeem their investment partially from tax saver mutual funds? No, investors cannot redeem their investment partially from tax saver mutual funds. The entire investment must be redeemed after the completion of the lock-in period.
6. How are tax saver mutual funds taxed? The gains made from tax saver mutual funds are subject to taxation. If the investment is redeemed before the completion of three years, the gains are treated as short-term capital gains and are taxed at the investor’s applicable tax rate. If the investment is redeemed after the completion of three years, the gains are treated as long-term capital gains and are taxed at the rate of 10% on gains above Rs. 1 lakh.
7. Can non-residents invest in tax saver mutual funds? Yes, non-residents can invest in tax saver mutual funds. However, they will be subject to taxation under the applicable tax laws.
8. Are tax saver mutual funds suitable for senior citizens? Tax saver mutual funds may not be suitable for senior citizens who have a low-risk appetite and require regular income. However, if the senior citizen has a high-risk appetite and is looking for long-term wealth creation, tax saver mutual funds may be a suitable option.
9. Can investors invest in tax saver mutual funds through SIPs? Yes, investors can invest in tax saver mutual funds through Systematic Investment Plans (SIPs). This allows investors to invest a fixed amount at regular intervals, which can help in achieving long-term financial goals.
10. Can investors claim tax deductions for investments made in previous years? No, tax deductions can only be claimed for investments made in the current financial year.