How to Save Tax with Mutual Funds Deduction?

Mutual funds, also known as Equity Linked Savings Scheme (ELSS), are great tax-saving instruments under Section 80C of the Income Tax Act, 1961. This section allows you to claim benefits from your taxable income if you put your money into certain investments.

What is ELSS?

ELSS is an equity diversified fund which is linked to the equity market. It is a mutual fund scheme that invests your money into equity and equity-related securities.


ELSS has a lock-in period of three years so you have to leave the money in these funds for minimum three years. And the longer you retain your investment into these funds the higher the chances of you making money.


You are allowed to invest up to Rs 1.5 lakh in tax-saving funds. You will get a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.

Advantage of ELSS

       a. ELSS funds are the only tax-saving funds within the Rs 1.5 lakh limit which has the additional advantage of giving equity-linked returns.

       b. Investing into ELSS allows you dual benefits – you get capital appreciation and tax benefits.

       c.  ELSS has the shortest lock-in period of three years when compared to other tax-saving instruments like PPF and NSC.

       d.  Since they are equity market linked, ELSS funds can bring in good returns over the long term, especially if retained        after the lock-in period is over.

       e. Good investment funds for those with moderate to high risk-appetite.

       f.  Dividends from ELSS funds are tax-free during the investment period.

       g. Profits from sale of ELSS fund units are considered long-term capital gains and hence, are tax free.

How to invest

  • The best way of investing into ELSS funds is through monthly SIPs (systematic investment plan). The minimum investment through a SIP can be as low as Rs 500 per month.

  • At the start of every year, work out the statutory deductions and calculate what you have left over from the Rs 1.5 lakh limit. Divide this amount by 12 to decide your SIP amount.