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What are mutual fund income tax exemption

When it comes to income tax exemption, we think of annual tax savings under Section 80C of Income Tax Act 1961. You have various investment options under Section 80C, Employee provident fund (EPF), Public provident fund (PPF), life insurance policies, National Pension Scheme (NPS), tax savings fixed deposits of bank, Mutual Funds ELSS schemes and post office and National Savings Scheme (NSC) etc.


Under Section 80C of Income Tax Act 1961, investors can get tax deduction of up to Rs 150,000 from their taxable income by investing in any or all the investment option available in India


Mutual fund income tax exemption


When it comes to mutual fund income tax exemption, ELSS or Equity Linked Savings Schemes (ELSS) can be the preferred choice for saving taxes under Section 80C of Income Tax Act 1961. Also known as tax saver funds, ELSS or Equity Linked Savings Schemes are equity mutual fund schemes which invest in a diversified portfolio of stocks with the objective of generating capital appreciation for investors over a sufficiently long investment horizon. Though ELSS investments are subject to market risks, they are among the best tax saving investments under Section 80C because historical data shows that equity has been the best performing (in terms of returns) asset class in the long term.


Read what are tax saving mutual funds in India


Let us see the returns of ELSS mutual funds schemes at a glance –


From the above chart you can clearly see that ELSS mutual funds can get you the best returns even though they are subject to market risks. For example - Historical data shows that equity has been the best performing asset class in the long term. Rs 1 lakh invested in the Sensex 20 years back would have grown to Rs 7.8 lakhs, while the same amount invested in gold or fixed deposit would have grown to Rs 5.2 lakhs and Rs 4.4 lakhs respectively.


See the historical returns of all ELSS mutual funds schemes in our research section.


Equity Linked Savings Schemes offer more liquidity compared to most tax saving (Section 80C) investment options. Equity Linked Savings Schemes have a lock-in period of 3 years. If you are investing in ELSS through systematic investment plan (SIP), each SIP instalment will be locked- in for three years. Most Section 80C investment options, other than ELSS, have a minimum lock-in period of 5 years.


The dividend option of Equity Linked Savings Schemes(ELSS) provides investors with the option of getting tax free income from their ELSS investment during the lock-in period and beyond. Investors should however note that mutual fund dividends are paid at the discretion of the scheme’s fund manager. There is no assurance with regards to timing or amount of dividends paid by mutual funds.


Please also read What is the tax on mutual fund income in India


Therefore, if you are looking for mutual fund income tax exemption make Equity Linked Savings Schemes or ELSS Funds an integral part of your tax planning for wealth creation in the long term.


Would you like to invest in top ELSS mutual funds in India, please try this link – Top 10 ELSS Mutual Funds


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