Tax planning is one of the most important aspects of financial planning. Section 80C of Income Tax Act 1961 allows tax payers in old tax regime to claim deduction of up to Rs 150,000 from their taxable income by investing in eligible tax saving schemes. Equity linked savings scheme of mutual funds is one of the eligible schemes.

Benefits of tax planning

  • Tax savings: The tax laws have several provisions (e.g. Section 80C, Section 80D, Section 24 etc) under which you can save taxes. Less tax means more money in your hands which results in substantial financial benefits.
  • Wealth creation in the long term: Tax savings investments if chosen wisely have significant wealth creation potential in the long term. ELSS mutual funds invests in a diversified stock portfolio.

Why start tax planning early in the year?

  • Avoid large tax outgo in the last quarter: For salaried people, most companies deduct tax in the last quarter of the financial year after accounting for all deductions. If you can’t avail the deductions, there will be a large tax outgo in the last quarter which may leave you with less money in hand for regular expenses.
  • Make investment decision based on risk appetite: There are several eligible schemes for 80C tax savings with different risk return characteristics. Planning early helps you to have time in hand to decide investment based on your risk profile. The table below shows interest rates / returns of popular 80C schemes including tax saving mutual funds.
Schemes PPF NSC Tax Saver FDs Life insurance plans – traditional ULIPs Mutual Fund ELSS
Interest Rates / Returns 7.1% 6.8% Varies from bank to bank Bonus rates varies across insurers and plans Market Linked Market Linked

Source: Post Office (PPF and NSC interest rates are applicable for 3rd quarter of FY 2021-22. There are no assured returns in life insurance plans and mutual fund ELSS. ULIPs and ELSS are subject to market risks.

Equity Linked Savings Schemes

ELSS funds are equity mutual fund schemes in India which are eligible for tax savings under Section 80C. ELSS tax saving mutual funds has a 3 years lock-in. You can invest in ELSS mutual fund through lump sum or SIP.

Why invest in ELSS?

  • Investing in ELSS mutual fund schemes through SIP can keep your tax planning in auto pilot mode and ensure maximum tax savings as well as wealth creation in long term through power of compounding.
  • ELSS mutual funds in India is one of the most liquid 80C investments in the long term. PPF maturity is 15 years from date of account opening with limited liquidity during the tenure. Similarly, NSC matures in 5 years while ELSS investments have only 3 years lock-in.

In summary ELSS mutual funds are the best tax saving option as it has the least lock-in period of 3 years, puts tax planning in auto mode if you are investing through SIP and gives you superior returns over other tax options.