Your Questions Answered: What are tax-saving index mutual funds and how do they work?

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Rajeev Sodhi, Bhatinda, Punjab Tax-saver index funds, also known as equity-linked savings schemes (ELSS) index funds, are a subcategory of ELSS mutual funds, that specifically invests in a basket of stocks that track a particular market index, such as the Nifty 50 or the Sensex. These funds offer investors the dual benefit of tax savings and the potential for capital growth. Tax-saver index funds work by investing in a basket of stocks that track a particular market index.

This means that the performance of the fund is closely linked to the performance of the index. When the index goes up, the fund goes up, and vice versa. Tax-saver index funds are eligible for tax deduction under Section 80C of the Income Tax Act, 1961.

This means that investors can deduct up to ₹1.5 lakh from their taxable income for investments made in these funds. There are several benefits to investing in tax-saver index funds, including: Tax savings: As mentioned above, tax-saver index funds are eligible for tax deduction under Section 80C of the Income Tax Act, 1961. This means that investors can save up to ₹1.5 lakh on their taxes each year by investing in these funds.

Potential for capital growth: Tax-saver index funds have the potential to generate capital growth over the long term. This is because the funds invest in a basket of stocks that track a particular market index, which means that they are exposed to the growth of the entire market. Low cost: Tax-saver index funds are typically low-cost mutual funds.

This means that investors can keep more of their returns as they do not have to pay high fees to the fund manager. Diversification: Tax-saver index funds offer investors a diversified investment portfolio. This is because they invest in