How Can Tax Saving Mutual Funds Help You Save Tax and Grow Your Wealth

There is no shortage of tax-saving instruments in India which allow taxpayers to save a considerable amount of money as per the IT Laws of the country. Some of the most common examples are fixed deposits and insurance products. But while the deposits come with long lock-in periods and insurance products eating a handsome amount from the gains in the agent commission, increasing number of taxpayers are now investing in tax saving funds.

These are diversified equity funds which qualify for tax exemption under section 80C of the IT Act. Apart from tax savings, these funds are also very popular for the capital appreciation they offer. If you are looking for a tax saving instrument that can help you save tax and grow your wealth, we have created a list of some important reasons that make these tax saving funds an excellent option.

1. Tax savings

Needless to say, the most important advantage of Tax Saving Mutual Funds is the tax savings they offer. Any long term capital appreciation or dividend earned by an investor by investing in these schemes is tax-free. By investing in one such fund, an investor can save up to Rs. 1,50,000 in taxes.

2. Long term growth

These funds come with a lock-in period of 3 years. However, you can keep your money invested for a longer period to gain better returns. As the money is invested in equity, your investment gets a better growth opportunity along with tax exemption.

3. Shorter lock-in

Unlike deposits, the lock-in period for these funds is usually three years. This means that you need to remain invested in these funds for at least three years to exempt yourself from paying taxes on the gains. This actually embeds an excellent habit of staying invested for a longer duration.

4. Inculcates habit of saving

You can start a SIP in one such fund with as little as Rs. 1,000. As the money will remain invested for three years, the returns from the SIP amount will start generating every month after three years when you first begin your SIP. This will help in nurturing a habit of regular investing.

5. Invest in the equity market

With the booming Indian economy, this is an excellent time to invest in the equity market. As these funds invest your money in equity, your investment gets an excellent opportunity to ride the growth cycle of the equity market and deliver excellent returns.

These are some of the most important reasons that make tax saving funds far better than other tax saving instruments. Before investing, just make sure that you thoroughly understand the fund you select or take help of an advisor to avoid any discrepancy.