Mutual Funds & Section 80C: Here’s How Investments Can Save You Tax
Section 80C is a clause under the Income Tax Act of India 1961 that includes a number of eligible investments (like ELSS mutual funds and Public Provident Fund among others) and expenditures to be exempted from income tax. Under this clause, you can avail of an income tax deduction of up to Rs.1.5 lakh each year from your total taxable income.
Here, we will first take a closer look at what Section 80C of the I-T Act entails, followed by a few key details about tax-saver mutual funds.
What is Section 80C?
Section 80C of the Income Tax Act is one of the most popular sections for taxpayers. Under this, taxpayers can reduce their taxable income by investing in eligible investment instruments or certain other expenses. Under 80C, you can claim tax deductions of up to Rs. 1.5 lakh in a financial year. You can also get an additional deduction of Rs. 50,000 under subsection 80CCD(1b).
80C is only applicable to individuals and Hindu Undivided Families (HUF) for tax exemptions. Companies, limited liability partnerships (LLP), and other businesses are not eligible to avail of tax benefits under this provision.
Also read: Different Types of Mutual Funds: How To Choose The Right Fund
Subsections of 80C
The following are a few subsections of Section 80C of the Income Tax Act.
| Section Names | Eligible investment schemes under these sections |
| Section 80C | Tax saving mutual funds like ELSS, Provident funds like EPF and PPF, life insurance premiums, payment made towards a home loan’s principal sum, Sukanya Samriddhi Yojana, Senior Citizen’s Savings Schemes, tax-saver FDs, National Savings Certificate, National Pension Scheme, Unit-Linked Plans, etc. |
| 80CCC | Payment made towards annuity pension plans |
| 80CCD (1) | Payment made towards government schemes like Atal Pension Yojana, National Pension System, etc. |
| Section 80CCD (1B) | Investments in NPS of up to Rs.50,000 get exempted under this section |
| 80CCD (2) | In NPS, the employer’s contribution (up to 10%, comprising basic salary and dearness allowance, if any) gets exempted |
What are 80C Mutual Funds?
Now, what are 80C mutual funds or tax-saving mutual funds? Tax-saving mutual funds are also called ELSS or Equity Linked Saving Schemes. Through such funds, you can claim a tax deduction benefit of up to Rs. 1.5 lakh per annum under this section.
ELSS are equity mutual funds where a minimum of 80% of the fund’s corpus is invested in equities or equity-related instruments. These have the shortest lock-in period (three years) among tax-savings investment instruments and a diversified portfolio in various industry sectors.
Also read: 10 Large Cap Mutual Funds That Can Be A Part Of Your Portfolio
Features of 80C Mutual Funds
- You can start investing in mutual funds under 80C with just Rs. 500.
- Investment options include systematic investment plans (SIP) and lump sum.
- There is no upper limit on investments; however, tax deduction benefits can be claimed only up to Rs.1.5 lakh in a financial year under Section 80C.
- There is a three year lock-in period for ELSS investments.
- ELSS funds are open-ended in nature.
- These funds offer you nomination facilities as well.
- ELSS investments can be redeemed only after three years; hence, long-term capital gains (LTCG) tax rules apply to the gains, i.e. gains above Rs.1 lakh in a financial year are taxed at a 10% rate without indexation.
Benefits of 80C Mutual Funds
Let’s check some of the benefits of mutual fund investment under 80C:
Shortest lock-in
ELSS or tax-saving mutual funds offer the shortest lock-in period of three years compared to other tax-saving schemes (five years for SSC, 15 years for PPF, etc). Also, ELSS offer more liquidity with its medium-term duration than other tax-saving investments.
Potentially higher returns
Equity Linked Saving Schemes offer greater potential returns than other tax-saving instruments as these schemes are market-linked products. However, ELSS also involve moderate to very high risks, which can be mitigated by investing via the SIP mode for a medium to the long-term investment horizon.
Better post-tax returns
Currently, any ELSS gains within Rs. 1 lakh have tax exemptions applicable. Gains exceeding this threshold have taxations applicable at a 10% rate, while short-term capital gains have a 15% rate. Hence, mutual funds under 80C offer you lower taxation.
Also read: Section 80EEA: How To Claim Additional Tax Deduction Benefits On Home Loans?
Ways to Invest in Tax Saving Funds
Growth option
If you choose the growth option, you will not receive any benefits in the form of dividends. You will be able to earn gains only after redemption. This helps to appreciate the total NAV and increase profits.
Dividend option
Here, you will get regular benefits in the form of dividends which are tax-free up to a certain limit.
Dividend reinvestments option
This option allows you to reinvest the dividends you receive to add to the fund’s NAV. This option is useful when the market witnesses an upswing and is expected to continue in the same way in future.
Things to Remember Before Mutual Fund Investments Under 80C
A few critical pointers that you must check before investing in 80C mutual funds.
- You must have a long-term investment perspective due to a three-year lock-in period.
- ELSS are market-linked products, hence they carry medium to very high degrees of risk. You’ll be well-advised to invest in them for the long-term through SIPs keeping in mind your financial goals and risk appetite.
- Consider the underlying theme of any particular mutual fund before investing.
- Check a fund’s past performance over a long period of time, albeit past performance shouldn’t ideally be the only criteria in selecting a particular fund.
- Compare a fund’s expense ratios before investing.
- In case of investments on your own, consider choosing the direct option to maximise investment returns.
Also read: How To Get Tax Deductions For Medical & Health Insurance Under Section 80D?
Final Word
80C is, thus, an excellent tool under the Income Tax Act of India 1961 to save taxes through certain investments like mutual funds. You can avail of such tax benefits by investing in 80C mutual funds like the Navi Long Term Advantage Fund. Download the Navi app today and enjoy the benefits of 0% commission and no exit and entry loads.
Frequently Asked Questions
Ans: Yes, both 80C and 80D are applicable to senior citizens.
Ans: Yes, you can claim tax deductions under 80C while filing income returns within the specific Assessment Year.
Ans: Both mutual funds under 80C and PPF are popular tax saving schemes under section 80C of the Income Tax Act of India 1960. However, PPF has an upper investment limit, a longer lock-in period (15 years) and usually provides lower returns than top-rated ELSS funds. But PPF is an extremely low-risk instrument due to its sovereign guarantee and is more tax-efficient than ELSS.
Ans: Banks and post-offices offer tax-saving FDs that allow income tax deduction under section 80C of the Income Tax Act of India 1961.
Ans: No. Health insurance premiums up to Rs.25,000 for self, spouse and dependent children and up to Rs.25,000 for non-senior citizen parents (up to Rs.50,000 for senior citizen parents) are covered under Section 80D. If both the assessee and parents are senior citizens, the maximum tax deduction benefit of Rs.1 lakh applies for medical insurance premiums in a financial year under Section 80D.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
