There are many financial instruments in the market that earn decent returns while saving taxes on your investment. These include Public Provident Funds(PPF), Postal Savings Schemes such as NSC (National Savings Certificate), tax-saving fixed deposits(FDs), and National Pension Scheme(NPS), etc.

While most of these investment instruments are widely regarded as highly safe, they require you to remain invested for periods ranging from five to fifteen years. On the other hand, ELSS (Equity linked savings scheme) Mutual Funds are tax-advantaged mutual funds that provide tax benefits similar to the instruments mentioned above but can provide higher returns.

Here are some of the reasons why you should invest in tax saving mutual funds such as ELSS.

1.     Better Returns With Short Lock-in Periods

An equity-linked saving scheme(ELSS) invests a significant part of its portfolio in equities. Equities tend to offer better returns when compared with other asset classes. Along with good returns, ELSS comes with a shorter lock-in period of 3 years.

2.     Tax Benefits

ELSS falls under section 80c of the income tax act. That means you can save up to Rs.46800 in taxes by investing Rs.1,50,000 per year. But you need to keep in mind that mutual funds come with higher risk when compared with other financial vehicles like PPF, Fixed Deposits, NPS, etc.

3.     Offer SIP

Aside from having the lowest lock-in time, ELSS allows you to receive monthly dividend payments. Furthermore, you may invest in a lump sum or through a systematic investment plan (SIP) for as little as Rs 500 per month, with no entrance or exit cost.

Investing through SIPs provides you with advantages such as rupee cost averaging and the power of compounding, in which your gains are reinvested. If you choose a SIP, keep in mind that each payment is considered a new investment and is locked in for three years from the investment date. There is no maximum investment limit, although you can claim deductions up to Rs 1.5 Lakh every fiscal year.

4.     Long Term Capital Gains

In terms of taxation, ELSS is subject to long-term capital gains tax, whereas NSC is subject to basic income tax. Furthermore, NPS is partially taxable. But PPF is a tax-free investment vehicle with no taxes on the investment amount, interest received, or maturity amount.

However, ELSS can provide much greater returns in a shorter investment term than all other tax-saving vehicles. It is ideal for those who wish to avoid taxes while earning above-average profits in the long run.

How to Invest in Tax Saving Mutual Funds?

1. The direct plan allows you to invest in mutual funds directly with the asset management company (AMC).
2. You must complete your KYC at a KRA (KYC Registration Agency) online by completing the KYC registration form
3. Later Submit self-attested identification evidence such as a PAN Card and address proof such as a Passport/Driving License/Voter ID, as well as a passport size photograph.
4. Also, You need to complete the IPV (In-Person Verification).

One can also invest in mutual funds through a mutual fund distributor on a regular plan. The mutual fund firm would pay a commission to the mutual fund distributor or middleman. You can invest in mutual funds offline by going to the mutual fund company, filling out an application form, and presenting your KYC papers.

Conclusion

In a nutshell, tax-saving mutual funds provide you with tax benefits as well as above-average long-term gains. As a result, any stock investments you make should be over a more extended period to avoid short-term volatility. However, because it is market-linked, there is still a bit of risk involved. If you aren’t willing to take on that risk, you should stick to traditional vehicles like government bonds, bank FDs, and PPFs, which provide somewhat lower but more safe returns.