Wealth Sips

Why tax saver funds are the best way to save tax

Tax Saver Funds

Benjamin Franklin famously quipped “Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes,”

The latter half of that phrase holds true to this day - that nothing, other than death and taxes is certain, at least for the average salary and wage earner in India. 

For the former we have Insurance and term plans - but what about the latter? How can we save tax?

The Big Question of Tax Saving

Especially in the last quarter of financial year the big question is “How do I go about tax saving?” is the big question in everyone's mind as we get close to the March deadline. Those of us who are salaried will have to start submitting investment proofs this month - so the sooner we get to it the better.

There are many ways to save tax - by investing in PPF, NPS or taking a Life Insurance Policy or a Mediclaim. But according to us the best way to save tax is by investing in an ELSS or an Equity Linked Savings Scheme - this is the best way of tax saving under Sec 80C for the simple reason that this is one way that also has the added benefit of helping you build wealth over the long term.

Where ELSS Scores Over Other Options

A point to note here is that ELSS or tax saving funds do NOT reduce your tax burden, but like other avenues under Sec 80C - investments in ELSS go towards reducing the taxable income, on which Income Tax is calculated. The total amount of deductions you can avail of under this section is upto Rs.1,50,000.

ELSS is one of the best options for tax saving for the simple reason that - as the name suggests - the money you invest in an ELSS is then re-invested in Equities - one of the best asset classes to invest in for building long term wealth. Another advantage here is that investments in tax saver funds have a 3 year lock-in period, which allows the Fund Manager of the tax saver fund to take a long term view of the market - without the fear of immediate redemptions hitting the fund. So one fund not only helps you reduce your taxable income but also helps you build wealth over the long term.

3 Main Advantages of Tax Saving Funds

  1. Helps you reduce your taxable income by availing deductions under Sec 80C
  2. Helps you build wealth over the long term due to the underlying investments in Equities
  3. The 3 year lock in period encourages investment discipline as you cannot withdraw your investment based on Market movements.

Hence when it comes to saving tax – don’t wait till March - invest in a Tax Saving (ELSS) scheme today!

Our top 3 recommended Tax Saver Funds are:

Funds 1 Year Return 3 Year Return 5 Year Return
Axis Long Term Equity Fund 18.59% 12.41% 14.26%
Invesco India Tax Plan 16.31% 8.67% 12.50%
Mirae Tax Saver Fund 19.60% 10.80% -
Returns shown above are annualized return as on 18 Dec 2020.

Click here to see the full list of the Best Tax Saver Funds

Watch the video on the best mutual funds to invest in 2021(including Tax Saver funds)