Tax saving mutual funds, also known as Equity Linked Savings Scheme (ELSS), are mutual fund schemes that provide investors with tax benefits under Section 80C of the Income Tax Act, 1961 in India. These funds invest primarily in equity and equity-related instruments, which offer higher returns than traditional tax-saving instruments like Public Provident Fund (PPF), National Savings Certificate (NSC), and tax-saving fixed deposits (FDs).
ELSS funds come with a lock-in period of three years, which means that the money invested cannot be withdrawn before that period. This lock-in period ensures that investors stay invested for the long-term and reap the benefits of equity investments. Additionally, ELSS funds have the potential to generate higher returns than other tax-saving instruments, as they invest primarily in equity and equity-related instruments.
Investors can invest up to Rs. 1.5 lakhs in ELSS funds and claim tax deductions under Section 80C of the Income Tax Act. The tax benefits are applicable only on the amount invested and not on the returns generated by the fund. Therefore, investors need to consider the risks involved in equity investments before investing in ELSS funds.