ELSS – Definition, Tax Benefits & How to Invest

An investor seeks investment opportunities that can generate wealth, produce regular returns, and save them taxes. Even though there are several investment schemes on the market, the majority of them offer returns that are taxed according to Income Tax regulations.

In such cases, investors may consider ELSS. The Equity Linked Savings Schemes or ELSS mutual funds are tax-saving equity investment funds. In this article, you will learn about the tax advantages of this fund and how to invest in it.

What is ELSS?

ELSS are equity mutual funds investing largely in equity and equity-related instruments. These funds are also called tax saving schemes as they offer tax exemption under section 80C of the Income Tax Act.

ELSS has a lock-in period of three years. These funds are usually preferred by taxpayers to avail of the tax benefits. If you invest in an ELSS fund, then you can avail of tax exemption of the invested amount up to a limit of Rs. 150,000.

Also, the income that you earn under this fund at the end of a three-year tenure is considered as Long Term Capital Gains (LTCG). If the income is above Rs. 1 lakh, LTCG is taxed at 10%.

Features of ELSS Mutual Fund

ELSS provide investors with tax benefits, which makes it appealing to investors. ELSS also includes the following features:

• Investment Options: ELSS offers two investment options – Dividend option, where fixed instalments are paid during the 3-year lock-in period. The Growth option provides a lump-sum payout after lock-in.

• Tax Benefits: Section 80C of the Income Tax Act, 1961 provides tax deductions for ELSS investments up to Rs. 1.5 lakh.

• Equity Exposure: With a minimum of 80% allocation to equity and equity-related instruments, ELSS offers the potential for higher long-term returns.

• Lock-in Period: ELSS funds come with a mandatory 3-year lock-in period, restricting withdrawals before completion.

• Diversification: ELSS portfolios are diversified across sectors and market capitalisations, mitigating risks and enhancing potential returns.

• Liquidity: Being open-ended schemes, ELSS funds allow redemption post-lock-in period, ensuring liquidity for investors.

• Systematic Investment Plan (SIP): Investors can opt for SIPs to systematically invest in ELSS, encouraging disciplined investment and long-term wealth creation. You can estimate potential returns with the help of a SIP Calculator.

How to Invest in ELSS?

With the help of the ELSS fund app, you can invest in the scheme. To invest in ELSS follow the below steps:

• Based on your financial goals and risk appetite, choose the ELSS fund.
• You must complete KYC (Know Your Customer) formalities with a registered mutual fund distributor or online platform.
• Choose the investment amount and payment method, lump sum or SIP.
• Provide the necessary documents, like PAN and Aadhar.
• Apply for the selected ELSS fund by filling out the application form.
• Make a bank transfer or online payment to invest the desired amount.
• It is important to understand and acknowledge the three-year lock-in period for ELSS investments.
• Monitor your investments and review them periodically.
• Decide if you want to redeem or continue investing after the lock-in period ends.

Advantages of Investing in ELSS

There are several advantages to investing in ELSS that make it an attractive option. Here are some of the benefits of the ELSS scheme:

• Short Lock-In Period: ELSS has a relatively short lock-in period in comparison to other investment options. This short lock-in period is suitable for short-term investors.
  
  
• Tax Benefits: Under Section 80C of the Income Tax Act, 1961, investments in ELSS up to Rs. 1.5 lakhs are tax deductible. Additionally, ELSS offers the potential for capital growth, which increases the tax advantage.

• Potential for High Returns: ELSS generally invest in equity-related instruments, which can provide substantial returns, especially when the stock market is performing well. When the economy is booming, a well-constructed portfolio can produce significant returns.

• Dividend and Growth Options: With ELSS, you have two fund options: growth fund and dividend fund. When you opt for the growth fund option, you receive a lump-sum payment after three years. If you choose the dividend option, fixed amounts are paid to you over a period of time in instalments.

• Investment Limit: A minimum investment of Rs. 500 is required to invest in ELSS. Its accessibility makes it appealing to young investors or those with lower taxable incomes.

Conclusion

With ELSS mutual funds, you can build wealth and save taxes at the same time. You can invest in ELSS funds through SIPs and take advantage of tax deductions under Section 80C. To make informed investment decisions, you should research and select ELSS funds that align with your risk tolerance and financial goals. Additionally, maintain a long-term perspective, and stay informed about market trends.

Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy.

It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information.

The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.

Past performance may or may not be sustained in future.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

 ELSS Investments are subject to a 3-year lock in period and are eligible for Tax Benefit under section 80c of Income Tax Act, 1961.

 “As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab.

Finance Act, 2020 has announced a new tax regime giving taxpayers an option to pay taxes at a concessional rate (new slab rates) from FY 2020-21 onwards. Any individual/ HUF opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions.

Since, individuals/ HUF opting for the new tax regime are not eligible for Chapter VI-A deductions, the investment in ELSS Funds cannot be claimed as deduction from the total income.

Investors are advised to consult his/her own Tax Consultant concerning the specific amount of tax and other implications arising out of his/her participation in ELSS”

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