True impact of investment in Tax saving funds
The tax saving category of mutual funds is called ELSS. It primarily invests in equities and equity-related instruments. Although equities can be very volatile in the short term, they outperform all other asset classes (including fixed-income products like bank deposits) over the long term.
As far as taxation is concerned, ELSS comes under the EEE (exempt-exempt-exempt) category. It is not just their investment amount, even their dividend income and maturity proceeds are entirely tax free. PPF is the only other Section 80C product falling under EEE regime. The interest earned on Tax Saving bank and post office FDs and NSCs are taxed according to your tax slab, investment products like NPS and pension plans are taxed at the time of maturity. While in the case of ULIPs, if the premium paid is more than 10% of the sum assured, the entire maturity proceeds is taxable according to applicable tax slab.
ELSS funds have the shortest lock-in period of just 3 years among all Section 80C products. Tax-saving fixed deposits have a lock-in period of 5 years, NSC have lock-in periods of 5 years while PPF has a lock-in period of 15 years, and ULIPs have a lock-in period of 5 years.