Paying taxes are always not the favorite among every individual as we realize that we need to part away with a good chunk of money. The returns of different tax saving instrument was again not so attractive for the investors. But now there are mutual funds. Mutual Funds by their very nature are not tax saving instruments but investment products that may offer tax concessions. But the emergence of ELSS mutual fund has changed the course altogether.



Equity Linked Savings Schemes (ELSS) are made with the purpose of saving tax through it in such way that you are not just saving but also investing that also in equities though a mutual fund. ELSS schemes give twice the benefit as compared with diversified equity schemes. They give you tax sops on investments and are also exempt from long term capital gains tax.

These tax saving are special equity funds, which have to invest at least 80% of their corpus in equity. The investments are locked in for a period of 3 years.

People in general have understood that ELSS is the best way of an investment option that provides you a very simple way of investing in equity market and save taxes while doing so. The biggest mistake investors make is that they view their tax-planning avenues in isolation and think about it just once a year. When you decide how much of your money you need to allocate to fixed return and equity and how you should distribute your risk, tax saving instruments must be taken into account. The route of SIP can also be undertaken by the investor. Through SIP in ELSS schemes the investors not only save and invest but also save tax regularly. If the investor continue doing this for a longer period of time then it is sure that the corpus of fund that can be created will be huge.

Apart from ELSS schemes, diversified equity schemes are a good investment considering that capital gains in equity funds below one year are taxed at a rate of 10% and over a year are tax-free. This option can be best exercised using a Growth Plan offered by mutual funds. The primary objective of a Growth Plan is to provide investors long-term growth of capital.

Dividend paid in Dividend Plans is tax free, and no distribution tax is deducted. To reduce the affect of STT you need to select the dividend option, since it remains tax-free. If you take out the profit in the form of dividend then you do not need to pay STT. For the risk averse, there are ways to reduce the tax burden on returns.

In the dividend option, dividend is tax free in your hands. But the dividend distribution tax deducted at source also comes out of your NAV. So you end up paying a tax of 10%. Further any increase in NAV over and above the dividend distributed, is taxed as in the case of the growth option.