How to save tax with mutual funds

As February approaches, most of us start looking for tax-saving solutions. Tax saving mutual funds can be efficient investment avenues that may help reduce your tax burden and at the same time increase your wealth.

In an endeavor to cut down the tax liability by as much as possible, a number of us end-up making hasty investment decisions, typically with long-term repercussions. This is true for most of us. We tend to our tax-saving investment choices for the last few weeks. However, it's imperative that one carefully plans and executes his or her investments well ahead.

While it's vital to possess adequate information concerning the various tax-saving provisions under the income tax Act, it's also critical to find out about the main tax saving instruments that allow you benefit from these provision.

ELSS Funds

ELSS – An Ideal Tax saver- Equity Linked Savings Schemes (ELSS) offers a simple option to obtain tax benefits and a chance to harness the potential upside of investing within the equity market. The primary objective of the scheme is to generate long-term capital appreciation from a portfolio that is invested predominantly in equities along with income tax benefit.

Since it's an equity fund, the returns from this scheme are market determined. Over a longer period of time ELSS funds deliver higher returns with tax-efficiency. It has also been observed that these funds tend to outperform other classes where returns are concerned.

Features of ELSS Funds

1. Tax-saving
2. Three-year locks-in period. This encourages long term investment among investors and also gives them enough time to manage their portfolios of stocks.
3. Can be held even after the completion of 3 years
4. Offers dividend as well as growth options
5. Option of starting with investing small amounts of as low as Rs. 500 a month.

Tax Treatment of ELSS Funds

The returns from an ELSS fund are tax free in your hands. The long run capital gains from an ELSS are tax free as well. This is as a result of no tax is levied on equities that are held for over a year. Since an ELSS falls under section 80C, you'll be able to claim around Rs. 1, 00,000 from your investment as a deduction from your gross total income.