There is an old saying that goes “the only certainties in life are death and taxes” and though there is little that you can do with respect to the former, it is very much possible to plan for and save on the latter. Among the various popular tax savings options that have become popular in recent times, probably none is as important as the ELSS Tax saver funds. However, there are numerous misconceptions regarding these mutual funds and in the following sections we will mention some of the key features of mutual funds as well as tax saver ELSS mutual Funds.
Mutual funds are investment instruments that are professionally managed and feature a diverse portfolio of stock, bond and money market instruments. There are three major categories of mutual funds – equity, debt and hybrid funds. Unlike investing in shares of a single company through a DEMAT account, mutual fund investments allow even novice investors to invest in the stocks and bonds of multiple companies, which reduces overall risk and increases the probability of capital appreciation.
Equity Mutual Funds
These are mutual funds that invest primarily in the shares of companies i.e. equity. Though these funds can invest their entire corpus in equities, usually they tend to hold minority investments in other money market funds and debt instruments to ensure liquidity of the scheme. A special category of equity mutual funds offer tax savings benefits and are therefore often marketed as tax saver mutual funds. These mutual funds are preferred by investors who are seeking potentially high returns on their investments.
Tax Saving Mutual Funds
It is also known as Equity Linked Savings Scheme (ELSS) and qualifies for tax benefits under section 80C and section 10 (D). A suitable investment option for investors having a medium to high risk appetite majorly because of the exempt-exempt-exempt status it enjoys. This ELSS tax saving scheme has a minimum lock in period of 3 years and the proceeds on death or maturity are completely tax free. It is a suitable option if you are looking for long term benefits, since its returns varies in line with the equity market, and potential for capital appreciation is high in case of equities. The popular ELSS funds include Reliance Tax saver fund, Axis Long Term Equity Fund, DSPBR tax saver Fund etc.
Debt Mutual Funds
This class of mutual funds invests primarily in debt instruments and is considered to be less risky investment option as compared to equity mutual funds. Though a major portion of the fund corpus would be invested in debt instruments and governments securities, smaller portions are usually allocated to equities and other money market instruments in order to ensure some degree of capital appreciation. This variant is more suitable for the risk-averse investor.
Hybrid Mutual Funds
This category of mutual funds follows a balanced approach by investing almost equally in both equity and debt instruments. The allocation is liable to change periodically as a result of various market factors. These funds are ideal for moderately risk tolerant investors who prefer consistent returns that keep pace with inflationary trends.
Comparison of key Tax Savings Options*:
|Parameters||ELSS||PPF||NSC||ULIP||NPS||Tax Saver FD|
|Investment type||Can be both short term and long term||Long term (15 years)||Short to Medium term (5 – 10 years)||ULIP Long term (10 – 30 years)||Long term||Long term|
|Lock-in period||3 years||15 years partial withdrawal possible from 6th year onwards||5 years/10 years (depends on issue series)||5 years renewals possible||Locked-in till retirement of member (premature withdrawal possible)||5 years|
|Minimum investment||Rs 500||Rs 500||Rs 100||Variable||
Rs 6000 (for Tier I a/c)
Rs 2000 (for Tier II a/c)
|Amount eligible for tax deduction||Rs 1,50,000||Rs 1,50,000||Rs 1,50,000||Rs 1,50,000||Rs 1,50,000||Rs 1,50,000|
|Interest rate||Market Linked||8%||8%||Market Linked||Market Linked||Depends on bank FD rates|
|Interest earned taxable||Dividends and capital gains are tax free||No||Yes||No||Yes||Yes|
|Safe/ Moderate/ Risky||Risky||Safe||Safe||Moderate||Moderate||Safe|
*The facts and figures above are indicative and liable to periodic change.
Reliance Tax Saver + SIP Insure
The following are some of the key reasons to invest through Reliance’s SIP Insure Program:
- The triple advantage of tax savings, capital appreciation and insurance rolled into one
- Complimentary insurance cover of up to 21 lakhs for the investor
- Lock-in period of only 3 years
- Complete transparency and enhanced safety of investment
- Easy to start the SIP with minimal documentation
To watch the Reliance SIP Insure programme video, click here.
The following is a tabular representation of the historic returns provided by the Reliance Tax Saver Scheme:
|SIP Returns of Reliance Tax Saver ELSS Fund|
|Period||Since Inception||10 Years||5 Years||3 Years||1 Year|
|Total Amount Invested||1,360,000||1,200,000||600,000||360,000||120,000|
|Scheme Return (%)||15.34||15.94||18.09||9.84||6.58|
|B: S&P BSE 100 Return(%)||8.68||8.28||8.38||3.61||2.79|
|Inception Date: September 21, 2005|
* Past performance may or may not be sustained in future and the same may not necessarily provide the basis for comparison with other investment.
- It is assumed that a SIP of 10,000 each executed on 10th of every month including the first installment in the Growth option of the Fund.
- Load has not been taken into consideration.
- Returns on SIP and Benchmark are annualised and cumulative investment return for cash flows resulting out of uniform and regular monthly subscriptions have been worked out on excel spreadsheet function known as XIRR.
The Income Tax Act of 1961 offers several tax saving instruments which can help the individual tax payer to maximize benefits and reduce the corresponding tax liability. Since, tax planning is something which can be rewarding and challenging at the same time, it is important to carefully access the various options available. While choosing a tax saving instrument that can be used to your advantage, you should consider key parameters such as returns, ease of investment, taxability of income, flexibility, costs and liquidity. The suitability of the instrument can also vary according to your requirements and financial goals. Since there is so much to take into account, having a go-to list of various tax saving options can make the task easier for you. So here is a list of best suited tax saving alternatives for your reference excluding ELSS Tax Saver Mutual Funds:
Tax Saving FDs: It is a tax saving investment plan through which you can claim deduction up to Rs. 1.5 lakhs under section 80 C. These FDs have a minimum lock in period of 5 years and can be opened through any public or private sector bank. The interest earned through tax saver FDs is taxable based on the investor’s current tax slab. It is a suitable investment option for those who are looking for guaranteed returns and are willing to lock in their money for a long duration.
Table for interest rates of Tax-saving Bank FDs
Tax-Saver FD interest rates
State Bank of India
PPF: Public Provident Fund scheme is a government sponsored tax saving investment option suitable for risk adverse people who wish to build wealth over a long period of time. The investments made under PPF are tax deductible and interest earned on maturity is tax free. It offers safety, comparatively better interest rates and has low overall cost making it a very popular choice amongst individuals. This tax saving plan is suitable only for people looking for long term investment plans since it has a maturity period of 15 years. However, partial withdrawal is allowed from the 6th year of the investment.
NPS: National Pension Scheme is also government sponsored recurring investment plan suitable for building retirement corpus. Investments made under NPS are tax deductible; however, the maturity amount is taxable. This tax saving option offers the liberty to choose the asset class and invest in the preferred category. The different asset profiles include E (Equity), C (Corporate Bonds) and G (Government securities); the risks and returns associated to each of these categories vary. However, in terms of liquidity it ranks low since you can withdraw the amount only after retirement. (You can withdraw 25% of it under special circumstances). It is the best tax saving investment plan for people with varying risk appetites looking for cost effective options.
ULIP: Unit Linked Insurance Plan is an integrated plan which offers life insurance cover and invest plan in a single scheme. It therefore enjoys tax benefits under both section 10(10D) and section 80 C of the Income Tax act. It lets you choose your investment options including the proportion of debt, equity or a mix of two that you want to invest in. This affordable and dependable tax saving alternative also belongs to the EEE (exempt-exempt-exempt) regime.
NSC: National Savings Certificate is a tax savings bond offered by the government of India. It is a secure investment option which is currently offering close to 0.75 %- 1% more interest than the tax saving FDs. While the interest earned on NSCs are taxable, experts believe that the applicable tax deductions effectively make it tax free for investors.
- National Securities Depository Limited
- Voluntary Provident Fund
- Provident Fund
- National Savings Certificate
- Senior Citizen Savings Scheme
- National Savings Scheme
- Public Provident Fund (PPF)
- Difference between EPF and PPF
- PRAN Card
- Post Office Time Deposit Schemes
- Post Office Monthly Income Scheme
- Post Office Tax Saving Scheme
- Universal Account Number (UAN)