What are Tax Saving Funds?
Tax Saving Funds , also known as Equity Linked Savings Schemes (ELSS), are mutual funds schemes established to offer investors the double advantages of wealth creation and tax savings. With the potential for high returns over time, these funds mainly invest in equities and equity-related instruments. Since ELSS investments can result in a tax deduction of up to Rs.1.5 lakh each financial year under Section 80C of the Income Tax Act, 1961, they are an attractive choice for investors willing to save taxes.
How do Tax Saving Funds Work?
Tax Saving Funds primarily invest in a diversified portfolio of equity stocks from a range of sectors and businesses and market caps by combining the money from multiple investors. Since these funds' performance is closely connected to the stock market, returns may differ based on the state of the market.
Out of all the Tax Saving Funds provided under Section 80C, ELSS funds have the shortest necessary lock-in period, which is 3 years. Due to this lock-in period, your investment will increase continuously for a specific amount of time.
Benefits to Invest in the Best Tax Saving Funds
1. Tax Savings: By investing in ELSS, you can significantly reduce your taxable income by claiming deductions under Section 80C of up to Rs.1.5 lakh.
2. Potential of High Returns: ELSS allows investing in equities and generating better returns than more traditional tax-saving ideas like PPF or NSC.
3. Short Lock-in Period: As compared to other Section 80C instruments, Tax Saving Funds have a 3-year short lock-in period.
4. Wealth Creation: These funds can generate significant wealth over time because it is an equity market-linked investment.
- 5. Expert Management: Professional fund managers who execute wise investment choices look after your money.
How Should You Invest in ELSS / Tax Saving Mutual Funds?
1. Lump-Sum Investment: This type of investment involves paying a significant payment at once and is most suitable for people who have extra funds on hand during the financial year.
2. Systematic Investment Plan (SIP): SIP permits you to make regular, monthly, or quarterly investments of a fixed amount of money. This method minimizes the effect of market volatility and helps in rupee-cost averaging.
3 . Evaluate Financial Goals: To determine if the Tax Saving Funds are suitable for you, evaluate your financial goals, risk tolerance, and investment horizon before making an investment.
4. Select the Best Fund: Analyze funds based on their portfolio composition, cost ratio, and previous performance.
Top Performing Tax Saving Funds in 2025
Some funds have consistently generated high returns, but past performance is not an accurate indicator of future results. These are some of the Best Performing Tax Saving Funds to think about in 2025:
Analyze each fund's record, investment strategy, and risk profile in detail before making an investment to be sure it is suitable for your financial goals.
Top five funds based on three years return
| Sr.No | Scheme Name | Category | Crisil Rank | Current Nav | 3 Year Returns(%) |
|---|---|---|---|---|---|
| 1 | MOTILAL OSWAL ELSS TAX SAVER FUND - GROWTH | EQUITY FUNDS | Rank 3  | ₹52.2025 | 23.21% |
| 2 | MOTILAL OSWAL ELSS TAX SAVER FUND - IDCW | EQUITY FUNDS | Rank 3 | ₹33.1234 | 23.21% |
| 3 | SBI LONG TERM EQUITY FUND - IDCW | EQUITY FUNDS | Rank 4  | ₹84.629 | 22.02% |
| 4 | SBI LONG TERM EQUITY FUND - GROWTH | EQUITY FUNDS | Rank 1  | ₹417.426 | 22.02% |
| 5 | HDFC ELSS TAX SAVER FUND - GROWTH | EQUITY FUNDS | Rank 1 | ₹1302.86 | 19.76% |
Taxation Rules in ELSS Tax Saving Mutual Funds
1. Tax Deduction: Section 80C permits tax deductions on investments made in ELSS Funds Tax saving Mutual Funds up to Rs. 1.5 lakh.
- 2. Long-Term Capital Gains (LTCG): Tax-free gains up to Rs. 1 lakh are allowed during a financial year. Gains over this amount are charged a 10% tax.
- 3. Dividend Income: If you choose to pay out dividends, the investor will be liable for paying taxes on the payouts according to their income tax slab.
How to Choose the Best Tax Saving Funds?
1. Fund Performance: To find out the consistency and returns of the fund, look at its previous performance over the last 3 years, 5 years, and 10 years.
2. Expense Ratio: The lesser ratio means that more of your money is being used to make returns.
3. Portfolio Diversification: Seek out funds that have a diverse range of market capitalizations across sectors.
4. Risk Profile: To avoid surprises, match your risk tolerance to the fund's level of risk.
5. Fund Manager Expertise: The success of the fund is highly influenced by the fund manager's background as well as investments
In Tax Saving Funds, Which is Better: SIP or Lumpsum?
When investing in Equity Linked Savings Schemes (ELSS), the decision between:
1) Systematic Investment Plan (SIP) and lumpsum investment depend on your financial goals and risk-taking ability. SIP offers a disciplined approach by investing smaller amounts regularly, which helps in alleviating the risks associated with market uncertainty through rupee cost averaging. This is ideal for investors looking for wealth creation over the long term while benefiting from the power of compounding. SIP also encourages long-term consistency, making it a safer choice for those who want to stay committed to their investments without the pressure of market conditions.
2) In Tax Saving Funds, lumpsum investment can be more rewarding in a bullish market as it exposes the entire corpus to the market's potential growth immediately. For investors with a large sum available and confidence in the market's upward direction, lumpsum investing can yield higher returns. However, lumpsum investment has risk associated with it as the entire investment is subject to market fluctuations from the start of the fund.
Ultimately, both options have their advantages, and the right choice depends on your investment horizon and risk appetite. Many investors choose a balanced approach, combining both SIP and lumpsum investments for optimal diversification.
Final Thoughts:
Tax Saving Funds allow you to increase your wealth and save taxes. These funds are unique from traditional tax-saving alternatives due to their special balance of equity exposure, tax advantages, and short lock-in period. However investing in ELSS involves carefully evaluating your financial objectives, risk tolerance, and market circumstances. Make a smart decision when you select the Best Tax Saving Funds, and start creating wealth tax-efficiently right now.
