Mutual funds are ideal when long term financial goals are concerned. In Mutual funds, Investors are free to choose the investment of their choice and liquidate them whenever they want. The power of money multiplication is the crucial factor in Mutual funds, where investors can invest in starting with as low as Rs. 500. These are often preferred as tax saving instruments as compared to other investment options like Fixed Deposit (FD), Public Provident Fund (PPF) or LIC investment plans as these funds grow over time and are subject to market conditions and related risks.
ELSS (Equity Linked Saving Scheme) is also a type of Mutual fund. In this scheme, money invested by the investor is distributed amongst different equity and debt securities with the objective of yielding maximum returns to the investor. The sum invested is locked in for a fixed tenure and after such a period the investor can withdraw at any time.
Here in this write-up, you will get to know all about “What is ELSS and How it can be used as an effective tool for tax saving?”
What is Equity Linked Saving Scheme (ELSS)?
Equity-linked saving scheme (ELSS) is like any other mutual fund scheme which includes equity-linked tax saving securities where returns are managed with tax-saving preferences of investors. Investment in ELSS can be done by an investor either through opening the own DEMAT Account and investing through SIP (Systematic Investment Plan) or through an intermediary who will take care of managing the right funds for higher returns.
In ELSS, money is invested with a minimum lock-in period of 3 years which is the lowest as compared to other tax-saving schemes like Public Provident Fund (PPF), LIC term deposits, etc. After 3 years, the money is left invested as like any other mutual fund scheme and can be withdrawn at any time after the lapse of 3 years. ELSS assures huge returns to the investor where money, when invested in a disciplined manner, grows with the power of compounding giving more returns for the investor.
ELSS offers returns in two modes- where the returns earned under the scheme are compounded back to the amount of investment and the total amount can be withdrawn after such lock-in period through reinvestment of interest or in dividend scheme, a particular dividend amount is separately given in the bank account of the investor as and when declared.
Why Invest in Equity Linked Saving Scheme (ELSS)?
Investing in ELSS is simple and yet more returning. Mostly, mutual fund advisors advise for investing in ELSS due to its linked benefits including:
- Minimum Lock-in Period: ELSS has a minimum lock-in period of 3 years where it yields the highest returns when compared to other investment options.
- Less Risky: ELSS comprising of both equity (usually between 60-65%) and debt (usually between 40-45%) is less risky in terms of investment and returns as money is invested in a way between different securities to yield maximum returns.
- Simple to invest: ELSS is very simple to invest, where an investor can through the SIP (Systematic Investment Plan) offered by many mutual fund intermediaries with as low as Rs 500 or by making a lump-sum contribution.
How to Choose a Perfect Equity Linked Saving Scheme (ELSS)?
Investment in ELSS means locking of funds in a particular scheme for a minimum of 3 years, where sitting back and watching market ups & down will only be left with the investor. So choosing the right ELSS to invest, requires advisory and comparative options.
It is recommended to take help of any business professional or financial advisor before investing in any market security. Expertise of a tax advisory is also recommended when tax saving is also a linked objective of investing in ELSS.
Here’s how you can choose the right ELSS scheme for yourself:
- Lookout for scheme portfolio and its investments, it is preferred where large-cap stocks are invested and portfolio provides a picture of moderate downturns & high returns in the last five years.
- Look for consistency of returns of the fund.
- Assure good market research of the scheme managers about their experience and proficiency in dealing market turns.
Tax Saving from ELSS
Returns received by the investor under ELSS Scheme are tax exempted for up to Rs 1.5 lakh (where no other exemptions are availed) under Section 80C of the Income Tax Act, 1961.
Note: With effect from Finance Act, 2018, for capital gains receipts above Rs 1 lakh for one year from ELSS is chargeable to capital gain tax at the rate of 10% (Section 112A, Income Tax Act, 1961).
Things to Know:
- Premature withdrawal within the lock-in period from the scheme will disqualify the investor from tax exemption under Section 80C.
- The lock-in period starts from the date of investment and not from the date of the start of the scheme, this means the 12th-month investment in ELSS through SIP, can be withdrawn only on or after the 48th month.
- If huge sum is to be invested, it is better to invest in multiple ELSS schemes.
Never rush to take out your ELSS investment just after the lock-in period closes. ELSS generally yields more effective retuns if left invested for a minimum of 5 years.
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