Why tax planning with mutual fund ELSS is a good option?

We are in the month of February and the deadline for doing your tax planning for this financial year’s investments is drawing nearer. If have not done your tax planning for Assessment Year 2022-23 (FY 2021-22), then you should do it now. The last date for making tax saving investments for AY 2022-23 is 31st March 2022.

Section 80C of Income Tax Act of 1961 allows investors to claim deduction of up to Rs 150,000 from their taxable incomes by investing in certain schemes which are eligible u/s 80C. These schemes include Employee and Voluntary Provident Fund (EPF and VPF), Public Provident Fund (PPF), National Savings Certificates (NSC), 5 year tax saver bank fixed deposits, life insurance policies (both traditional and unit linked) and mutual fund Equity Linked Savings Schemes (ELSS).

How to plan your taxes?

There are various sections in Income Tax Act, which can enable investors to claim tax deductions but we will restrict ourselves only to section 80C in this post.

  • The maximum allowable deduction irrespective of income tax slabs u/s 80C is Rs 150,000

  • If you are a salaried investor and contributing to EPF, your contribution to EPF will be included in 80C deduction.

  • If you are paying home loan EMIs, then the principal component of the EMI payments for the year will also be included.

  • If you have life insurance policies, the premium for the year will be included.

  • If you have life insurance policies, the premium for the year will be included.

  • Calculate how much deductions you can claim from the above and how much investment you need in order to claim the full benefit u/s 80C.

  • Select the suitable 80C scheme to make your tax saving investments depending on your risk appetite and financial goals. In this post, we will discuss how mutual fund ELSS can you help you in tax planning and also wealth creation over long investment tenures.

What is ELSS?

Equity linked savings schemes (ELSS) are equity mutual fund schemes. Investments in ELSS are eligible for deductions from your taxable income under Section 80C of Income Tax Act. There is no upper limit on investments in ELSS, but maximum deduction allowed u/s 80C is capped at Rs 150,000. ELSS funds have a lock-in period of 3 years. No redemption or withdrawal is allowed in the lock-in period. If you are investing in ELSS through Systematic Investment Plan (SIP), each SIP instalment will be locked in for 3 years.

ELSS invests in equity and equity related instruments. ELSS funds usually diversify across market cap segments and industry sectors; there are no SEBI mandated limits on market cap allocations for ELSS. Since ELSS funds are market linked investments, they are subject to market risks. You should invest according to your risk appetite and consult with your financial advisor if you need any help.

Why invest in ELSS?

  • Interest rates of Government small savings schemes eligible for 80C deductions e.g. PPF, NSC etc are steadily coming down over the last several years. Interest rate of PPF and NSC as on 31st December 2021 are 7.1% and 6.8% respectively (source: GOI, Department of Post). 5 year tax saver Bank FD rates have also come down.

  • Equity as an asset class, though volatile, has historically given superior returns over long investment horizons. The chart below shows the CAGR (annualized) returns of Nifty 50 TRI over different investment tenures ending 31st January 2022.

Source: National Stock Exchange, Advisorkhoj Research, as on 31st January 2022. All returns are in CAGR. Disclaimer: Past performance may or may not sustained in the future


  • Tax planning should not be just about tax savings; it should also help you in your long term financial goals. ELSS investments have the potential to create wealth over long investment tenures.

  • The chart below shows the growth of Rs 10,000 monthly investments in Nifty 50 TRI. With a cumulative investment of just Rs 12 lakhs in 10 years, you could have accumulated a corpus of more than Rs 26 lakhs. Please note that we have taken Nifty 50 TRI as a proxy for equity as an asset class. Since ELSS invests across equity market cap segments, there is potential of higher alphas and wealth creation.



Source: National Stock Exchange, Advisorkhoj Research, as on 31st January 2022. All returns are in CAGR. Disclaimer: Past performance may or may not sustained in the future


  • ELSS provides superior liquidity compared to other 80C investment options. ELSS has lock-in period of just 3 years. Other 80C investments do not provide any liquidity before minimum 5 years. Liquidity is always an important consideration in investments.

  • ELSS is one of the most tax efficient investment options u/s 80C. Capital gains of up to Rs 100,000 are tax exempt and taxed at 10% (plus applicable surcharge and cess) thereafter. However, if you opt for the IDCW option, then the dividend payments will be added to your income and taxed as per your income tax slab.

Who should invest in ELSS?

  • Investors who are looking for tax savings and capital appreciation over long investment tenures

  • Investors with moderately high to high risk appetites. Consult with your financial advisor, if you are unsure about your risk appetite

  • Investors with minimum 3 years (lock-in period) investment tenure. However, we recommend 5 years plus investment tenures for ELSS

Investors should consult with their financial advisors if ELSS is suitable for their tax planning needs and invest as soon as possible in order to claim tax benefits in this financial year

Issued as an investor education initiative by HSBC Mutual Fund.

Article Source: Advisorkhoj.com

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully


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