1. All Mutual Funds are not Tax Saver Mutual Funds
Tax Saver Mutual Funds (also known as ELSS - Equity Linked Savings Scheme) are a special category of Mutual Funds where investments are eligible for tax deductions under section 80C of the Income Tax Act. They are about 40 in number.
2. Tax Saver Mutual Funds are Equity Mutual Funds
Tax Saver Mutual Funds are a type of Equity Mutual Funds. This means that they invest in the stock markets and your investments are exposed to market risk.
This also implies that they don't guarantee any returns and one could even make a loss by investing in them.
3. There is a lock-in of 3 years
All investments made into Tax Saver Mutual Funds are locked-in for 3 years from the date of investment.
In fact all tax-saving instruments under section 80C have some lock-in period eg 15 years for PPF. Amongst all, Tax Saver Mutual Funds have the shortest lock-in of just 3 years.
4. Each SIP instalment or lumpsum will have its own lock-in of 3 years from its date of investment
For eg, if you made a lumpsum investment of Rs 20,000 on 15th July 2017 and you have a running SIP of Rs 10,000 for the 20th of every month starting August in Tax Saver Mutual Funds then -
a) The lumpsum investment of Rs 20,000 will become lock-in free on 15th July 2020.
b) For the SIP - each month's instalment is treated as a separate investment. So the 20th August 2017 SIP instalment will become lock-in free on 20th August 2020. The 20th September 2017 SIP instalment will become lock-in free on 20th September 2020 and so on.
5. You can not withdraw the money before the lock-in is over
Even in case of some emergency, you can not withdraw the money invested before the lock-in is over.
Even if you are ready to pay a penalty and/or forego the tax benefits, you can not withdraw the money.
Also, the money cannot be transferred to any other Tax Saving Mutual Fund during that period.
6. The gains will be taxed at 10% (but the principal will be tax-free) on withdrawal
Gains that you make during the investment period will qualify as Equity Long Term Capital Gains at the time of withdrawal which will be taxed at 10% (irrespective of your income tax slab).
So if your 1.5 lakhs investments has turned into Rs 2 lakhs after 3 years and you sell all of it, you will have to pay 10% taxes on the Rs 50,000 gain i.e. Rs 5,000. (However, equity LTCG gains upto 1 lakh in a financial year are exempt from tax at the PAN level, so if these are your only equity LTCG gains for the year then you wont have to pay any taxes).
The original investment of Rs 1.5 lakh will be tax free in any case.
Have questions regarding Tax Saver ELSS Mutual Funds or tax saving under 80C in general? Ask us in the comments below. :)