L&T Mutual Fund
L&T Mutual Fund

Tax Planning with Mutual Fund

Towards the end of the financial year, most of us start chalking out our tax plans, or the lack of one. If you are a salaried professional, you might get a reminder from your accounts department and if you are self-employed, your accountant would remind you to ‘do your taxes’. Either way, it ends up being at the eleventh hour.

While some of us may have done the smart thing by planning early, the majority might have not. However, this is merely a ‘tax saving’ exercise and cannot be called ‘tax-planning’. Tax planning is all about planning in advance, which involves evaluating your overall tax strategy and implementing it before the year-end. In this way, you can make the most out of your tax saving opportunities, which would eventually help you accumulate wealth over the long-term. Tax Planning is an essential part of financial planning and deserves the rightful time and effort.

So when we think about tax-saving as a goal, various options come to mind, that qualify for deduction under Section 80C of the Income Tax Act, 1961, which allows deduction up to Rs. 1,50,000. The options available under Section 80C are as follows:

Market linked Fixed Income Others
Equity Linked Savings Scheme (ELSS) Public Provident Fund (PPF) Life Insurance premium
Unit Linked Insurance Plan (ULIP) National Savings Certificate (NSC) Re-payment of House Loan (principal)
  Tax Saving FDs Children’s tuition fees
  Senior Citizen Saving Scheme  
  Employee Provident Fund  
  NABARD Bonds  

With the host of options available, the obvious question is 'which one to choose'.

The answer however varies, from person to person, objective to objective, and as per the risk appetite. However, it is important to look at not just the tax saving criteria but also its potential to generate returns that would beat inflation in the long term.

One such investment avenue that aims to provide both, tax saving benefits as well as a relatively higher growth potential, is Equity Linked Saving Schemes.

What is ELSS?

Equity Linked Saving Schemes (ELSS) is an equity mutual fund and has a lock-in period of 3 years. It has a minimum of 80% exposure in equity and upto 20% in debt, money market instruments, cash or even more equity.


As compared to other investment avenues, ELSS provides the lowest lock-in period and relatively higher potential for returns due to its linkage to the equity markets. Here’s a comparison of the most common features that widely available tax saving instruments provide:

  Equity Linked Saving Scheme (ELSS) Life Insurance Policy Public Provident Fund National Savings Certificate (NSC) Tax Saving FDs
Lock-in period 3 years 5 years 15 years 5-10 years 5 years
Returns* 14-16% 0-6% 8.5% 8.5% 9.5%
Are returns taxable? No No No Yes Yes

This is for illustration purposes only. Your investment decision will depend on your own risk appetite and time horizon. Recipient of this information should understand that statements made herein regarding future prospects may not be realized. Investments in mutual funds and secondary markets inherently involve risks and recipients should consult their legal, tax and financial advisors before investing.

“Premature part withdrawal facility available after 7th financial year

Of all the above mentioned options, ELSS offers the lowest lock-in period along with the twin benefits of tax saving and capital growth.

Some of the main advantages of ELSS are as follows:

  1. Investment in ELSS could provide capital growth over the long term since they invest in the equity market
  2. An investment made in ELSS is eligible for tax exemption up to Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961
  3. ELSS has the lowest lock-in period of 3 years as compared to other investment avenues

Advantages of ELSS as compared to National Savings Certificate (NSC) and Public Provident Fund (PPF)

  1. Main advantage of ELSS is its short lock-in period. Maturity period of NSC is 6 years and PPF is 15 years.
  2. Since it is an equity linked scheme earning potential is very high.
  3. Investor can opt for dividend option and get some gains during the lock-in period.
  4. Equities over a longer time frame have the potential to outperform traditional instrument like NSC and PPF.
Disadvantages of ELSS
  1. Risk factor is high compared to NSC and PPF
  2. Premature withdrawal is not allowed but it is allowed in other instruments in some specific conditions.
Investing in ELSS through Systematic Investment Plan (SIP)

The best way to invest in ELSS is through Systematic Investment Plan (SIP). SIP helps an investor take advantage of the fluctuations in the stock markets by rupee cost averaging. Rupee cost averaging is a process through which, with the invested amount, more units would be bought at a lower price and lesser units at a higher price, thereby averaging out the cost.

But if an investor backs out when the markets are falling, he won't be buying and this will not get him to average his price, the primary reason for which a SIP is recommended. The money invested in ELSS gets invested in equity markets wherein, market ups and downs happen over a period of time. Thus, investing through SIP in ELSS and staying invested would be the ideal way to ride the market ups and downs and build wealth in the long term.

Overall, ELSS is a good investment vehicle to save tax as well as to grow your investments over the long term. You could reap better returns from appreciation in equity markets over the long term. You can also choose the SIP route to avoid ups and downs of markets. If you really want to reap the rewards of your tax saving investments, think beyond the lock-in period of three years. Over the long-term, equities deliver relatively higher returns and aid capital growth.

Make tax saving a habit, not a last minute rush. Invest in the ELSS vehicle to save tax as well as create wealth over the long term!