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Best Tax Saving SIPs in 2022: Make most of your investment through mutual funds in India

Mutual fund investment does come with a reasonable amount of taxes. Any interest you make from your investment instruments is subject to taxes. Let us explore more.

Depending on how much you gain from your investments, there will be different types of taxes, such as income tax, capital gains tax, and dividend tax. These taxes can impact your returns and ultimately hinder your financial goals. When such situations happen, investors tend to lose interest in mutual funds and stop investing, especially new investors. The good news is that you can reduce those tax numbers significantly by investing in tax-saving SIPs. This article guides you through all the ins and outs of tax-saving SIPS and various tax-saving options such as ELSS, so make the most of your investment. 

ELSS or Equity Linked Saving Scheme is one of the classes of mutual fund schemes that majorly invest in equity stocks. The ELSS SIP scores over other tax-saving instruments because of its lock-in period of three years. It means investors can sell their units three years after the date of purchase. The notable thing about ELSS SIP is each installment comes with a 3-year lock-in period, so each SIP installment has a different maturity date. Besides, ELSS schemes qualify for Section 80C and offer a tax deduction on investments up to 1.5 Lakh.

Best Tax Saving SIPs (ELSS SIP)

The following table shows some of the best tax-saving SIPs and their returns over the years.

Scheme NameDirect plan - Growth optionMinimum SIP(Rupees)AUM(Rs. crores)3 years(CAGR)5 years(CAGR)
Baroda BNP Paribas ELSS Fund1,000721.4812.47%10.76%
IDFC Tax Advantage (ELSS) Fund5003,715.9717.16%14.29%
Mahindra Manulife ELSS Kar Bachat Yojana500462.7715.17%10.81%
Nippon India Tax Saver (ELSS) Fund1,00012,022.728.11%5.56%
PGIM India ELSS Tax Saver Fund1,000384.2416.00%13.22%

Who can invest in Tax Saving SIP or ELSS?

ELSS funds are perfect for both salaried individuals and first-time investors. In fact, these funds are suitable for anyone who wants to experience the best of both worlds of equity, and mutual funds can invest in ELSS. Equity does come with an associated risk, but that's for the short term. If you invest for more than three years, the risk is much lower. One of the best ways to get started with ELSS is through SIP. Doing so helps you keep your portfolio balance of risk and return. You can accumulate more units during down-market situations and generate favorable returns when the market is doing well. Along with extraordinary returns, the ELSS fund qualifies for tax exemption under Section 80C, helping investors gather more returns than other investments.     

ELSS SIP tax benefit

Investments in ELSS are eligible for tax exemption under Section 80C of the Income Tax Act, 1961. While there is no upper limit specified for the investment amount, a maximum of Rs 1.5 lakh is eligible for deduction. Furthermore, the return earned from the equity and equity-related instruments after the holding period of one year will be considered long-term capital gains (LTCG). Investors incur a 10% LTCG tax on capital gains above Rs 1 lakh. 

Risks associated with ELSS

While ELSS is known for offering exceptional returns, it does come with various risks that investors must be well aware of before investing. 

  • Liquidity risk: It occurs in such situations when investors fail to redeem their investment at the needed time. ELSS funds come with a fixed 3-year lock-in period. During this tenure, the investors can neither redeem nor transfer their investment. In simple words, ELSS binds the investors with a lock-in period where they can't take any decision.  
  • Market Risk: When the market poorly performs, it can put the investor at the risk of losses. Since the ELSS mostly deals in equity-related instruments (approximately 80%), these funds are sensitive to market risks. There can be many reasons that can impact the market negatively, such as recession, changes in interest rates, natural disasters, and more.
  • Performance Risk: The success of funds relies on the approach and active management of experienced fund managers appointed by the fund house to manage the investor's portfolio. Performance risk occurs because of fund manager lapse in judgment. It negatively impacts the scheme's portfolio and costs losses to investors, thus failing to receive the expected returns. 

Return potential of ELSS SIP funds 

ELSS fund returns are often higher when compared to other tax-saving investment options such as FD and PPF, especially when the markets are showing a bullish trend. With a lock-in period of just three years, ELSS mutual funds have become the preferred tax-saving investment option among the new and experienced investors alike. Even if you look at the post-tax returns of ELSS, they are much more appealing than any other available option out there. It has a great potential to offer you a return with a minimum investment amount and timeframe.

Mutual fund's compounding effect concerning the time

Mutual funds such as ELSS SIP focus on the compounding process to generate better returns over time. The whole purpose of ELSS SIP is to take advantage of this compounding effect by investing small amounts in intervals. The invested amount grows gradually with time, allowing better returns on your investments. Suppose you start a SIP of Rs 5000 at an expected return rate of 15% with a financial goal to buy a house in the next ten years. Post calculating, we have a final value of Rs 13.76 lakhs. A total investment of Rs 6 lakhs over ten years grows to such significant amounts. That's the benefit of compounding you receive for investing in ELSS funds through SIP.

Advantages of ELSS mutual funds

ELSS offers a lot of benefits apart from being an equity-oriented mutual fund and offering more profitable returns on investments.

  • Tax Redemption: One of the biggest advantages of investing in ELSS is its tax-saving capability. ELSS is the only mutual fund that offers tax deductions of Rs 1.5 lakh per year under Section 80C. Even with the introduction of new taxation rules that indicate long-term capital gains from ELSS above Rs 1 lakh are taxable, these are still the best taxing funds available. They offer higher post-tax returns when compared to Unit Linked Insurance Plans (ULIPs) or Public Provident Fund (PPF).
  • Inculcates discipline in investors: With a SIP, you can invest in ELSS fund schemes with a minimum of Rs 500. Such smaller amounts and automated payments process remove all the hurdles to payments every month, making investors more consistent and disciplined towards their investments and financial goals.
  • Hassle-free investment method: You can easily invest in ELSS funds through a monthly SIP of a minimum of Rs 500. For salaried employees and new investors, SIP is the best option as they can invest in smaller amounts at their convenience without being overwhelmed by the instalments. SIP also removes the need for manual payments. The amount automatically gets deducted from your requisite account every month and invested into your chosen fund, ensuring a smooth investment process.
  • Affordable options to invest in mutual funds: With SIP, you can start investing in tax-saving mutual funds with an amount as low as Rs 500 monthly instead of making a one-time investment. You can gradually increase the SIPs once you become acquainted with mutual funds.
  • Offers diversification: With a minimum investment amount through SIP, you can reap portfolio diversification benefits. Most ELSS funds invest across a diverse range of companies in various sectors. It allows the investors to have an element of diversification while they minimize considerable risks.

Why should investors invest in ELSS?

Tax saving mutual fund or ELSS is among the best and most efficient tax-saving investment options that stand out for its peculiar qualities. With good features and remarkable potential to deliver high returns, ELSS offers many such features making it a worthwhile investment to opt for. 

  • Wealth creation with tax advantages: ELSS funds are equity funds that invest in companies of all sizes and sectors. These funds hold tremendous potential to create a massive corpus over a long period by investing in inequities. Additionally, when you invest in ELSS funds, you claim up to Rs 1.5 lakh tax reduction under Section 80C. 
  • Shorter lock-in period than others: The lock-in period of ELSS is comparatively less, only three years. This shorter time frame allows the investors to be more comfortable with their investing horizon and make most of their investment.
  • SIP makes it better: Investors can easily opt for SIP for ELSS investment. You can start with as low as Rs 500 and increase the amount when you get a hold of your mutual fund investment. Besides, you can get tax benefits of investing monthly rather than putting an amount of 1+lakh in one go through a lump sum. Most tax-saving options don't provide this systematic way of investing money every month.
  • Better post-tax returns: ELSS invests mostly in equity-related stocks. Hence they attract twice or more returns from the market than other tax-saving schemes. ELSS has a minimum 3-year lock-in period. Post this tenure, the long-term capital gains (LTCG) of up to Rs 1 lakh a year from ELSS are exempted from income tax, ensuring good returns for investors. Figures suggest that an ELSS, on average, can generate approximately 12% returns over ten years.


Even though tax saving funds or ELLS are equity-oriented funds and carry considerable risk, they have tremendous potential for long-term wealth generation. The incentive to save tax and ease of investment makes ELSS funds the right choice to fulfill your financial goals. Make sure you select the fund based on your financial and risk appetite. The risk appetite may vary with various factors such as age and life stage. Hence risk profiling is essential before you plan to invest in tax-saving funds.

To read more on similar topics, click here:

Best SIP Plans

Best Debt Funds

Best Tax Saving Investments


Get all your queries answered related to ELSS or tax-saving funds. 

Q. How to select the best tax-saving SIP or ELSS SIP funds?

A: As an investor, you must check the fund house and fund the manager's past performance to see if they are competent enough to deliver consistent results during all market phases. Also, it's imperative to consider the expense ratio. A higher expense can significantly impact your returns. While investing in ELSS funds, select those funds with a less expense ratio.

Q. Do I have to redeem the units once the ELSS tenure completes?

A: It is not necessary to redeem your investment post-lock-in period. You can choose to stay invested in the fund if you find it performing well.

Q. What happens if I don't redeem ELSS units post-lock-in period?

A: After the lock-in period, the fund becomes an open-ended equity scheme and continues to generate returns for you. It's easily redeemable as per your wish.

Q. What is the minimum SIP amount for ELSS funds?

A: The minimum investment amount required for ELSS investment through SIP is Rs 500.

Q. What is the right time to invest in ELSS funds?

A: There is no right time to enter the investment journey through ELSS. You can invest in ELSS through SIP as per your wish. However, if you have long-term financial goals for 10-20 years, you must start investing early. You can choose a direct or regular investment plan. With a direct investment plan, you can directly contact the fund house. In the case of a regular investment plan, you can get the assistance of intermediaries platforms such as Glide Invest.

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