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Save tax and Plan retirement with Mutual Funds

  September 6,2018

For most Indians, retirement is the most ignored financial goals. From the beginning of career we start chasing short term goals which gives us short term gratification like buying a car, buying a New smartphone, vacation etc. Most of our savings is channelized in achieving our Retirement Goal.

However, we all have a desire to save tax. We can channelize this desire to achieve two goals,

  1. Saving Tax
  2. Creating Retirement Corpus

Under section 80C, a deduction of Rs 1,50,000 can be claimed from your total income. In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income through section 80C. This deduction is allowed to an Individual or a HUF.

To save tax, we normally invest in PPF and other instruments which has a long lock in period. When you are ready to invest for such a long period, investing in equity is better idea, as equity is less risky and more rewarding in long term. You may choose to invest in Equity Linked Savings Schemes (ELSS) of mutual funds to save tax under section 80 ( C ).

What is ELSS?

An Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that doesn't just help you save tax, but also gives you an opportunity to grow your money. It qualifies for tax exemptions under section (u/s) 80C of the Indian Income Tax Act.

Along with the tax deductions, an ELSS offers you the opportunity to grow your money by investing in the equity market. ELSS carries a lock-in period of 3 years. Furthermore, you can also choose to invest through a Systematic Investment Plan and bring discipline to your tax planning.

Here's how it will work. Say, one invests Rs 12,500 monthly in ELSS (Rs 1.5 lakh annually) for 25 years of one's working life towards retirement. Assuming a growth rate of 12 percent a year, the corpus could be nearly Rs 2.12 crores, which could be part of one's retirement portfolio in addition to other investments earmarked for retirement. 

SCHEME NAME 1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 12 Year 15 Year
Capital Invested
Rs 1 Lac Rs 2 Lacs Rs 3 Lacs Rs 5 Lacs Rs 7 Lacs Rs 10 Lacs Rs 12 Lacs Rs 15 Lacs
Retruns Generated from Various Schemes
Maximum ELSS Return ₹ 1,21,559 ₹ 2,75,071 ₹ 4,41,203 ₹ 8,98,110 ₹ 16,13,266 ₹ 26,14,434 ₹ 35,18,416 ₹ 82,92,953
Minimum ELSS Return ₹ 1,00,030 ₹ 2,29,534 ₹ 3,50,048 ₹ 7,25,657 ₹ 12,12,686 ₹ 19,86,361 ₹ 25,83,101 ₹ 48,77,739
Average ELSS Return ₹ 1,10,884 ₹ 2,51,585 ₹ 3,89,498 ₹ 8,08,623 ₹ 13,58,294 ₹ 23,01,979 ₹ 30,64,690 ₹ 69,33,800
S & P BSE Sensex ₹ 1,13,410 ₹ 2,45,862 ₹ 3,72,791 ₹ 6,97,401 ₹ 11,06,090 ₹ 17,71,240 ₹ 23,53,781 ₹ 47,32,426
PPF Calculated @ Actual Rates ₹ 1,07,829 ₹ 2,24,307 ₹ 3,50,839 ₹ 6,37,886 ₹ 9,76,743 ₹ 15,94,563 ₹ 20,93,314 ₹ 30,01,347

Past Performance may or may not sustain in future.The above table shows the value of Rs. 1 Lac invested in PPF, Sensex and various ELSS Schemes as on 31ˢᵗ May of every year. (Valuation Date : 31ˢᵗ May 2018) Note: Amount assumed Rs. 1 Lac in PPF & ELSS. However, deduction u/s 80C has been increased from Rs. 1 Lac to Rs. 1.5 Lacs w.e.f 22ⁿᵈ August 2014.

Disclaimer: The information contained in this report has been obtained from various sources. While utmost care has been taken for the preparation of this report, we do not guarantee its validity or completeness. Neither any information nor any opinions expressed constitute an offer, or an invitation to make an offer to buy or sell any fund. Investors should take financial advice with respect to the suitability of investing their monies in any fund discussed in this report. Mutual fund investment are subject to market risk. Please read Scheme Information Document and Statement of Additional Information carefully before investing.