ELSS or Equity Linked Savings Schemes is similar to a diversified equity mutual fund. These schemes are exempted from income tax under section 80C of the Indian Income Tax Act. It features a twin advantage of capital appreciation and tax benefit. ELSS is a great investment option for investors who are investing for the first time. Basically, it is a tax saving mutual fund.
There are several good schemes that have good returns and tax saving benefits. Some features of ELSS are listed below:
- In certain circumstances, an ELSS can save you as much as ₹46,800 in taxes
- You get high returns on your investment and also tax benefits
- It has a lock-in period of just 3 years, compared to 5 years for other schemes. This is the lowest among other tax benefits (80C) options.
- You can invest just ₹500 monthly in SIP and avoid the last minute rush to save taxes.
- ELSS is transparent where you can easily track your investment and check all your transactions. This helps you to stay on top of your portfolio.
What is Equity Linked Saving Schemes
Before you make any investment in tax saving mutual funds like ELSS, it is important to understand what it is and why it is better than other tax saving (80C) investment schemes. ELSS are basically funds that are managed by a team of highly educated finance professionals who have years of experience large funds. They invest your money in instruments that will give you returns and tax benefits as well.
To avail of the tax benefit under 80C, you can invest up to ₹1.5 lakhs in one financial year. That does not stop you from investing more than this amount. However, any investment over this amount will not be eligible for tax deductions under Section 80C of the income tax act.
Despite the new changes to the tax deduction rules, the ELSS is still a preferred option for investors looking for tax saving mutual funds.
Different Types of ELSS
There are two types of funds that can be categorised as ELSS. They are dividend fund and growth fund.
- Dividend Payout Funds
These funds can be further divided into two types- Dividend Payout option and Dividend Reinvestment. In the case of dividend payout, the investor will receive a tax-free dividend. In the case of dividend reinvestment, the dividend will be reinvested in the fund as a fresh investment.
- Growth Fund
This is a long term wealth creation fund where the investors get the full value (with returns) of their investment at the time of redemption.
Things to Consider Before You Invest in ELSS
It is important to have a clear understanding of your investment goals and all aspects of the fund. You will have to match your goals with your choice of fund. There are many sites offering expert advice from financial experts who will suggest a fund that is suitable for you. They offer funds that are risk levels from high risk to medium to low. Every individual has a different preference. Some would like to take the risk while others may not be so enthusiastic. Each fund is unique, and there is no “one-size-fits-all” solution. It is better to take your final call with the help of a professional.
- Any amount can be invested in an ELSS fund. However, only ₹1.5 lakhs is eligible for tax exemption under section 80C.
- It offers a long term capital gains tax up to ₹1.0 lakhs while dividends are tax-free.
- You can continue to park your investment even after the lock-in period.
- The risk in an ELSS option is higher than a Banks fixed deposit of PPF. However, the returns are potentially higher than an FD.
Is ELSS Better Than Other Schemes With 80C Tax Exemption
As per new regulations long term capital gains are likely to be taxed. In spite, of these new laws, experts believe that ELSS is still a good tax saving option. These investments play an important role in your portfolio since they carry the potential of high returns and are generally the best choice for long term investment. These investments have better returns than other 80C investment options like Provident Fund and ULIP.
What are the Major Benefits of ELSS funds?
Investing in ELSS funds has several benefits and includes the following
- ELSS funds have a shorter Lock-in Period compared to other tax saving investment instruments like Public Provident fund, National Savings Certificate, Tax saving mutual fund, Employee Provident where the minimum lock-in period is five years. On the other Hand, the lock-in period for ELSS Funds is just 3 year.
- You get higher returns by investing in ELSS since the investments are made in the equity markets. Also, you save on taxes under Section 80C of the Income Tax Act. Generally, ELSS gives you a return of approximately 12% over a period of 10 years and more.