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An Equity Linked Savings Scheme, also known as ELSS, is a diversified equity mutual fund. ELSS tax saving funds have a lock-in period of three years and are offered by mutual fund companies in India. The funds provide tax deduction of up to Rs. 1.5 lakh under section 80C of the Income Tax Act 1961. Compared to other investment policies like NSC or Public Provident Funds, ELSS has a short lock-in period of 3 years. However, returns of ELSS tax saving funds are market linked as these schemes primarily invest in equity markets. In this blog, we will discuss ELSS investment plan and ELSS tax benefits in detail.
What is an ELSS Fund?
An ELSS fund is an equity-oriented mutual fund with a mandatory lock-in period of 3 years. In recent years, taxpayers have favoured ELSS plans to avail tax benefits from equity investments. If you invest in an ELSS investment plan, you can avail of a tax deduction of up to Rs. 1.5 lakh in a financial year on the invested amount. Apart from the ELSS tax benefit on the invested amount, the gains from these schemes at the end of your three-year tenure will be considered as Long Term Capital Gain(LTCG) and will be taxed at 10% (if total gains during the financial year is above Rs. 1 lakh).
ELSS tax saving investments can be made in the same way you invest in any other mutual fund. You can invest in ELSS as a lump sum or via the SIP (Systematic Investment Plan) route.
SIP ensures financial discipline and decreases the risk to the investment through rupee cost averaging. Starting with investments as low as Rs 500 per month in an ELSS fund, investors can claim tax benefits of up to Rs 1.5 lakh in a financial year.
Features of ELSS
Some key features of ELSS Funds are:
- ELSS funds invest at least 80% of their portfolio in equity and equity-oriented investments
- They have a compulsory lock-in period of 3 years, which is the shortest amongst all tax savings instruments
- After completion of the lock-in, you can stay invested as long as you want as there is no maximum investment tenure.
- ELSS tax saving investments do not have any entry or exit load
- Good ELSS funds can generate returns between 10-12 percent in the long term, which is the highest in the tax-saving category of instruments. However, ELSS investment come with some risk as they are primarily invested in equities
- You enjoy dual advantages of long-term capital appreciation from investment in equity along with ELSS tax benefits
- Income that an investor earns under this scheme at the end of three-year tenure is considered Long Term Capital Gain(LTCG) and taxed according to the prevalent tax rules
- ELSS investment plans have a diversified equity portfolio as they invest in stocks of companies of various sizes and across multiple sectors
- You can enjoy tax exemption of up to 1.5 lakh in a financial year under Section 80C of the Income Tax Act 1961 by investing in ELSS mutual funds
- Good ELSS funds can generate returns between 10-12 percent in the long term, which is the highest in the tax-saving category of instruments. However, ELSS investment come with some risk as they are primarily invested in equities
- You enjoy dual advantages of long-term capital appreciation from investment in equity along with ELSS tax benefits
- Income that an investor earns under this scheme at the end of three-year tenure is considered Long Term Capital Gain(LTCG) and taxed according to the prevalent tax rules
- ELSS investment plans have a diversified equity portfolio as they invest in stocks of companies of various sizes and across multiple sectors
- You can enjoy tax exemption of up to 1.5 lakh in a financial year under Section 80C of the Income Tax Act 1961 by investing in ELSS mutual funds
Tax Benefits Offered Under ELSS
Any individual who investments in an ELSS tax saving mutual fund can avail tax deduction of Rs 1.5 lakh in a financial year under Section 80C of the Income Tax Act 1961. Compared to other tax saving investment plans under section 80C like NSC or Public Provident Funds, ELSS offers the shortest lock-in period of 3 years.
Further, the returns that one gets by redeeming ELSS units are considered as long-term capital gain (LTCG), which is taxed at 10%, if total LTCG from equity investments in a financial year exceeds Rs. 1 lakh. So even individuals who comes under the maximum 30% income tax slab rate only have to pay up to 10% tax on the returns from an ELSS investment plan.
Who Should Invest in ELSS Funds?
Any individual looking for tax deduction benefits and wants some good return while doing so can opt for ELSS investment plans. Some key features to consider when making ELSS tax saving investments are:
1. SIP – Investors have a choice of investing in ELSS in either lump sum or via SIP (systematic investment plan). Investors can get ELSS tax benefit for amounts as low as Rs. 500 per month. Most investors prefer the SIP as it allows them to invest small amounts and avail ELSS tax benefits, and it also reduces the overall risk of investing in equity markets.
2. Risk Reduction and Diversification – ELSS funds make diversified equity investments. So these schemes invest in large cap, mid-cap and small cap companies across various sectors. This diversification helps reduce the overall risk of equity investments.
3. Low Minimum Amount – An individual willing to invest in ELSS can start by investing as low as Rs. 500 per month as SIP, which ensures financial discipline while making tax-saving investments.
Although investors can avail of ELSS tax benefit of only up to Rs. 1.5 lakh yearly under section 80c, they can invest more. What’s more investors can also choose to stay invested and earn returns after the lock-in period of 3 years for as long as they want.
2. Risk Reduction and Diversification – ELSS funds make diversified equity investments. So these schemes invest in large cap, mid-cap and small cap companies across various sectors. This diversification helps reduce the overall risk of equity investments.
3. Low Minimum Amount – An individual willing to invest in ELSS can start by investing as low as Rs. 500 per month as SIP, which ensures financial discipline while making tax-saving investments.
Although investors can avail of ELSS tax benefit of only up to Rs. 1.5 lakh yearly under section 80c, they can invest more. What’s more investors can also choose to stay invested and earn returns after the lock-in period of 3 years for as long as they want.
Things to Consider Before Investing in ELSS
Before investing in the ELSS tax saving funds, you need to consider the following road maps.
1. Plan a Personal Financial Roadmap
The decision to invest shouldn't be based on just the ELSS tax benefits and investing in ELSS should not be looked at from a short-term perspective. Although ELSS investments have a minimum lock-in of three years, linking the investments to longer-term goals is beneficial.
Investors must keep their investment horizons longer than 5 years and be patient to get favourable outcome from ELSS tax saving investments. It is crucial to distribute investments equally throughout the year via SIPs rather than investing all at once to avoid the impact of short-term market swings.
If an investor is investing a lump sum amount at one go, they will get the investment and gains in return after three years, but if an investment is made in SIP format, then the monthly SIP instalments get locked in for three years individually.
2. Get to Know Your Comfort Zone in Taking Risk
Any type of investment involves some degree of risk. Whenever an investor intends to purchase securities - such as stocks, bonds, or mutual funds - it is necessary to understand the risks involved before making the investment. Investors are at times rewarded with great investment returns for taking risks. If an investor has a financial goal with a long-time horizon, they are likely to make more money in return by making investments is equity-oriented instruments like ELSS mutual funds.
3. Appropriate Mixture of Investments
An investor can protect himself against significant losses by including multiple asset categories in their investment portfolio.
2. Get to Know Your Comfort Zone in Taking Risk
Any type of investment involves some degree of risk. Whenever an investor intends to purchase securities - such as stocks, bonds, or mutual funds - it is necessary to understand the risks involved before making the investment. Investors are at times rewarded with great investment returns for taking risks. If an investor has a financial goal with a long-time horizon, they are likely to make more money in return by making investments is equity-oriented instruments like ELSS mutual funds.
3. Appropriate Mixture of Investments
An investor can protect himself against significant losses by including multiple asset categories in their investment portfolio.
Inclusion of multiple asset classes ensure that with overall portfolio returns are minimally impacted by market conditions. This helps the investor reduce the risk of losing a huge amount of money when equity markets undergo a correction.
FAQs
Q. Can I withdraw all money from ELSS after 3 years?
If an investment has been made in ELSS Mutual Fund investment via the lump sum route, all the units will be allotted on the same day. Therefore, once the 3-year lock-in period is over, an investor can redeem the entire ELSS investment.
Q. Can I redeem ELSS mutual fund anytime?
No, you can't redeem ELSS mutual fund anytime. ELSS tax saving investments do not allow withdrawals before the end of the 3-year lock-in period.
Q. Is ELSS taxable after 3 years?
The Long-Term Capital Gains on ELSS are taxable at 10% of gains if total long term gains during the financial year exceed Rs. 1 lakh. ELSS gains are tax-free up to Rs. 1 lakh in a financial year.
Q. What if I sell ELSS units before 3 years?
ELSS funds cannot be withdrawn before completion of the lock-in period of 3 years. Therefore, the option of selling ELSS units before completion of 3 years is not available to the investor..
Q. Is ELSS compounded interest?
Equity Linked Savings Scheme is a type of equity mutual fund with a lock-in period of three years and a tax-saving element. As ELSS returns are linked to equity market movements, it does not provide compound interest like a FD.
Sources:
https://www.mutualfundssahihai.com/en/elss-fund-tax-saving-mutual-fund
https://economictimes.indiatimes.com/industry/banking/finance/banking/4-reasons-to-invest-in-elss-funds/articleshow/90509295.cms
https://economictimes.indiatimes.com/investments-markets/tax-saving-mutual-funds-equity-linked-savings-scheme/elss-funds-have-both-dividend-and-growth-options/slideshow/18224168.cms
https://www.mutualfundssahihai.com/en/who-should-invest-in-tax-saving-mutual-funds
ARN No: Jan23/Bg/04B
