Tax Planning Funds

Definition: Tax-planning funds cater to the investors’ need of minimizing tax burden on the returns from investments. They are also called equity-linked tax saving funds or ELSS. These funds are market capitalization agnostic. These are close ended schemes with a lock-in period of 3 years.

Description: These are like typical mutual funds, which help to diversify investments across different varied market capitalization stocks and in addition also help you reduce your tax burden by creating a portfolio which takes the maximum advantage of the tax exemption under Section 80C of the Income Tax Act, having an upper limit of Rs 1,00,000.

Why Tax-planning Funds?

Tax-planning funds offer you the best of both worlds. This is the only way you can keep the taxman away and still enjoy the benefits of equity investing. These funds also offer an opportunity to small investors, who otherwise don’t have extra money, to invest in equity schemes.

By design, the category has many advantages over other investment schemes. The first one is a three-year lock-in period, as compared to NSC and PPF, which have lock-in periods of four and 15 years respectively. Also, there is no lock-in for dividends in the tax-planning funds, and like all equity fund dividends, these too are tax-free.

Also, the three-year lock-in gives fund managers freedom to take sector and stock bets, which they are not able to do in the regular equity fund schemes. This makes this category relatively more volatile than diversified equity funds but gives a chance to generate higher returns. As on September 30, 2016, there were 38 tax-planning equity funds. Together, they have Rs 48831 crore assets under management. Axis Long Term Equity, the largest fund in the category, commands more than one fifth of the category’s assets.

Source: Economic Times, Value Research and Motilal Oswal

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