What are Tax Saving Mutual Funds?

Published On: 25-Feb-2020

When it comes to saving taxes, Mutual funds also have a specific category of funds, which are eligible for tax benefit under Section 80C. This category of tax saving mutual fund schemes is known as Equity Linked Savings Scheme (ELSS). The portfolio of such funds must comprise of at least 80% equity securities and are subject to a lock-in period of 3 years from the date of investment. 

With the increasing preference amongst the millennials to invest in new-age investment products instead of traditional investment products, ELSS is also emerging as a preferred investment option for availing the tax benefit. This also reflects in the MF industry data released by the Association of Mutual Funds in India (AMFI) which reveals that 19.84% of the total equity investor folios, i.e., 1.24 crore folios out of the overall 6.25 equity folios, have invested in ELSS funds. Further, ELSS funds have Assets Under Management (AUM) of Rs. 1.04 lakh crores as on 31st December 2019 (Source - AMFI).

With predominant investment in equities, ELSS funds can help the investors generate healthy returns over the long term. Here is a brief performance snapshot of ELSS funds over different periods, based on category averages:


1-year returns

3-year returns

10-year returns

ELSS Category





* Returns more than 1 year have been annualised. Disclaimer – Past performance is not a guarantee of future returns. Source – ValueResearchOnline

When talking about the tax benefit, one can avail of a tax benefit of up to Rs. 1.50 lakhs under Section 80C in a financial year by investing in ELSS. Even when such funds are subject to lock-in period wherein they cannot pledge or liquidate the investments, it is important to note for the taxpayers that the lock-in period of 3 years under ELSS funds is the lowest among all the investment options under Section 80C. In case of the investments made through Systematic Investment Plan (SIP), the 3-year lock-in period starts from the date of each investment in such funds.  

Recognizing that the ELSS funds can also be used as an investment vehicle to achieve different financial goals, there is no restriction placed on the investors to invest more than the specified amount. As such, the taxpayers are free to invest an amount more than the specified limit of Rs. 1.50 lakh, but any such investment will still be subject to the lock-in restrictions, even when the investor has not availed the tax benefit. Further, unlike most of the other tax saving options under Section 80C of Indian Income Tax Act, there is not compulsion for the investors to liquidate their investments and they can continue with their existing investments even beyond the expiry of the lock-in period of 3 years and the redemption of the investment is made only upon the specific request of the investor. 

In terms of the tax incidence, the investors are not liable to pay any tax on the unrealized gains on their mutual fund investments, which are only subject to tax at the time of redemption. The returns from ELSS funds in the form of appreciation in NAV (Net Asset Value) will be taxed as Capital Gains. 

Further, ELSS funds, being equity oriented mutual funds with the holding period of at least three years due to the lock-in period, the gains shall be taxed as Long-Term Capital Gains (LTCG). Thus, such gains will be taxed at 10% (plus applicable cess and surcharge) without the benefit of indexation. However, the extent Income tax laws also provide for an exemption of Rs. 1 lakh in respect of LTCG from equity shares and equity-oriented mutual funds in aggregate, including ELSS during a financial year. 

As such, ELSS funds can be considered for investment by the investors to save taxes and aim to benefit from the potential of better returns over the long term.

Note: The tax provisions, as mentioned in the article, are only for illustrative purposes and updated as per the Finance (No. 2) Act, 2019. However, the tax incidence will be as per the tax laws as on the date of redemption of the mutual fund units. Contact your tax advisor for more details.

Disclaimers: The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2019. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.

UTI AMC Ltd is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (acting through UTI Trustee Company Pvt. Ltd) accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services.