Over the past few years, mutual funds have emerged as one of the most sought-after investment avenues for many investors. The increasing inflows in this asset class stand testimony to their growing popularity. While their ability to deliver inflation-adjusted returns in the long run is well-known, did you know that you can even plan your taxes and retirement with them? Read on to know how you can do so.

Tax Planning With Mutual Funds

You can easily lower your tax liability by investing in a category of mutual funds known as equity-linked saving scheme or ELSS. Investment in ELSS is liable for tax exemption under section 80C of the Income Tax Act, 1961. You can claim a maximum deduction up to Rs. 1.5 lakh in a financial year.

Also, investing in ELSS has twin benefits. It not only helps save taxes but also aids you to gain from the high return potential of equities in the long term. It is important to note that while you can invest any amount in ELSS, the maximum deduction you can claim is Rs. 1.5 lakh in a financial year, provided you haven’t invested in any other tax saving basket under section 80C.

So, for instance, if you have invested Rs. 50,000 in a public provident fund (PPF) and another Rs. 50,000 in a national savings certificate (NSC), you can invest the remaining Rs. 50,000 in ELSS to completely exhaust the permissible tax break offered under this section. On the contrary, if you haven’t invested anything in any instrument under section 80C, you can spend the entire Rs. 1.5 lakh in ELSS to lower your tax liability.

Retirement Planning With Mutual Funds

Mutual funds also help you realise an essential financial goal, retirement. With mutual funds, you can build a sizeable retirement corpus that helps you take care of your post-retirement needs. The advantage you get with mutual fund is that it enables you to build a retirement nest factoring in inflation, something fixed-return instruments lag.

The table given below shows the inflation-adjusted CAGR returns of equity funds (large-cap) vis-à-vis fixed-return instruments for a period of 10 years:

Asset class Inflation-adjusted CAGR returns for a period of 10 years
Large-cap fund 8.41%
EPF 1.26%
PPF 0.88%

As evident, large-cap funds have outperformed fixed-return instruments by a big margin.

Once you have calculated the amount you need to maintain post-retirement expenses, you can invest a fixed sum every month, through SIP, in an equity fund to reach close to the desired corpus. For instance, a SIP of Rs. 10,000 per month in an equity fund offering 12% returns for 30 years can help you garner a corpus upwards of Rs. 3.5 crores.

As you approach retirement, you can slowly withdraw money from the equity and transfer it into a debt fund to prevent erosion of the accumulated wealth due to market swings. Thus, with mutual funds you can easily plan your taxes and save for retirement.

Explore Various Mutual Funds here.


The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product.  Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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