Under section 80C, Indians can invest upto Rs 1 lakh in ELSS (Equity Linked Saving Scheme, also commonly known as Tax Saver schemes) funds per year/per individual. The amount invested in a ELSS/Tax Saver scheme is Tax deductible on your tax return.
Example :-
Say you are a male and earned Rs 2 lakh. You invest Rs 1 lakh in a ELSS fund, such as HDFC Tax Saver fund.
Your taxable income in this case would be: Rs (2 - 1) lakh = Rs 1 lakh. For a taxable income of Rs 1 lakh, there is ZERO tax.
Had you “NOT” invested in the HDFC Tax Saver fund, then your taxes are
Your taxable income in this case would be: Rs 2 lakh. For a taxable income of Rs 1 lakh, there is a tax of Rs 15,000/-.
Therefore, in this scenario, you save Rs 15,000/- in taxes by investing in a ELSS scheme.
Now, what is the catch for investing in a ELSS scheme - Your invested money is LOCKED for a period of 3 years. i.e., Once invested in a Tax Saver fund, your money cannot be taken out for a period of 3 years. But this is a blessing in disguise, because Tax Saver funds generally yield healthy returns during a 3 year period.
So it is a good option to save tax and create long-term wealth with ELSS. You get returns from the equity market only when you have a long time horizon. If you keep adding money in a disciplined manner, you create a good corpus. My experience of the past 1 year shows that people have got interested in ELSS as they wanted to save tax and create wealth.
There are people who invest Rs 50 lakh in ELSS, though the tax saving limit is only Rs 1 lakh. Returns are likely to be better, given that the ELSS has a lock in period of three years and that the fund manager has the freedom to invest in the stocks whose value will unlock after a long time.
Comparing equity mutual fund and a ELSS one, Equity MFs you could buy them today and dispose of them tomorrow - i.e., there is no time limit for redemption, except for exit loads. However with ELSS MF funds, there is a compulsory 3 year lock. As per the rules related to long-term capital gains, profit from equity MFs after one year becomes tax-free.
10 Recommended ELSS (Tax Saving) Mutual Funds -
- Principal Personal Taxsaver
- DSP ML Tax Saver Fund
- Taurus Libra Taxshield
- Lotus India Tax Plan
- SBI Magnum Tax Gain (G)
- Sundaram BNP Paribas Tax Saver
- Birla Tax Relief 96 (D)
- Sahara Tax Gain
- Kotak Taxsaver
- Sundaram BNP Paribas Tax Saver 98
Check out Top Mutual Funds for Investment in 2008
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