What are ELSS funds & 5 Benefits of ELSS funds?
Rahul Khasnis ELSS Funds or Equity-Linked Savings Schemes have gained popularity in recent years. As the name suggests it primarily invests your money in the stock market or equity. It is one of the popular choices among investors under tax saving mutual funds.
Investments up to 1.5 lakhs are considered for a tax deduction up to 80C of the Income Tax Act in a financial year.
The investment in ELSS mutual fund schemes can be done either as a lump sum or via monthly systematic investment plans (SIP). The best part of ELSS mutual funds is the shortest lock-in period of 3 years. One can invest in it for a longer duration for higher returns.
Further, the income you earn under this scheme at the end of the three-year tenure will be considered Long Term Capital Gain (LTCG) and taxed at 10% (if the income is above Rs. 1 lakh).
So this brings to us a zillion questions that are on your mind after reading this. We have tried to answer a few of the questions so that you are well informed before you begin your investment journey.
How does ELSS Mutual Funds work?
ELSS funds are diversified equity funds that are primarily invested in stock listed companies in a specific proportion as per the fund’s investment. The stocks are chosen from across market capitalization (large caps, mid-caps and small caps) and aimed for capital appreciation in the long run.
Who should invest in ELSS mutual funds?
Since ELSS funds are diversified equity funds that provide tax deductions under section 80C of the income tax act, they are suitable for anyone who is willing to take the risk of an equity-oriented tax savings instrument.
Those who are taxpayers like salaried people, Businessmans , HUF all can invest in ELSS mutual fund schemes. It is often known for better suitability for those who have a constant salary and wish to save tax and make investments at periodic intervals. Also if you are a young taxpayer then investing in ELSS funds will give you two benefits: growth potential of equities over a long period of time and avail tax benefits.
ELSS can be your preferred tax saving option depending on your age, income, risk preferences and other liabilities like home and education loans that make the old tax regime more appropriate for you. They have a minimum lock-in period of 3 years.
Therefore, you can withdraw your money only after 3 years in case of lumpsum investment. The lock-in period is also applicable to each SIP payment. So you will have to wait till the last SIP instalment has completed for 3 years if you want to withdraw the full money invested.
What is the best way to invest in ELSS: Lump Sum or SIP payment?
The best possible way of investing in ELSS depends on when and why one is investing in ELSS. If one is looking for saving tax at the end of a financial year then a lump sum payment is the only choice he is left with.
But if you start investing at the start of the year then it is advisable to get the SIP payment so that you can avail the benefit of different NAVs throughout the year and also reduce the risk by spreading the investments across the year.
How does ELSS match up against other tax savers?
Apart from ELSS, there are other popular tax-saving investments available in the market. These include the public provident fund, national pension scheme, national savings certificate and the tax-saving bank term deposit.
Given below is a comparison of the five products:
Instrument | Lock-in Period | Risk Profile | Tax Implication |
Public Provident Fund | 15 Years | Low-risk | Maximum investment of Rs.1,50,000 p.a. and interest earned tax-free on maturity. |
National Pension Scheme | Till retirement | Low-risk | Tax deduction of up to Rs.2,00,000 p.a. |
National Savings Certificate | 5 Years | Low-risk | Tax-deductible up to Rs.1,50,000 p.a. and interest reinvested. Interest tax-exempt for four years, but eligible for taxation in the fifth year. |
5-Year Bank Fixed Deposit | 5 Years | Low-risk | Up to Rs.1,50,000 tax deduction under Section 80C, interest is taxable |
ELSS | 3 Years | Market-linked risk | Tax-deductible up to Rs.1,50,000 p.a., but returns are taxable. |
What are the advantages of the ELSS funds?
Here are 5 unbeatable reasons to invest in ELSS funds:
1. Tax Savings Like Never Before
The one major reason why ELSS funds are always in demand is that they save a lot of money while investing. Investment up to 1.5 Lakh INR qualify for tax deductions under section 80C of the income tax act of 1961. This is a great way to create wealth while reducing your tax liability.
2. Lowest Lock-in Period
Unlike other tax saving schemes, ELSS mutual funds have the lowest lock-in period of 3 years. This means that you are obligated to invest for at least 3 years. It is to be noted that among the other tax-saving schemes ELSS funds also give higher returns in a shorter duration. While pertaining to the performance of mutual funds, a good portfolio is constructed for long term investments, ELSS funds become an easier way to do because of its lock-in period.
3. Long Term Value Growth
The gains from the sale of ELSS funds are long-term. ELSS funds give lower tax expense automatically. As these funds invest your money in equity, there are chances of higher returns with certain tax relaxations.
4. Ride the Benefit of Compounding
Equity investments are advised to be done in a long time horizon spanning from 5-10 years. ELSS mutual funds by virtue of their lock-in period bring about a disciplined long term investment habit by default. And this helps the investors to enjoy the power of compounding in the long run.
5. Scope of SIP Options Available
Investors may choose to go with the investment through the SIP option while they opt for ELSS funds. It allows the investor to invest a fixed amount regularly. This feature enables the salaried class to invest a fixed sum from their savings periodically, usually every month.
At Khasnis Prime Wealth, we conduct in-depth research on the best ELSS investment options to optimise good returns over other tax saving investment options, mitigate potential losses while entailing better returns on your investments.
Bottom Line
ELSS can be a good option to consider if you are debating on how to save tax while creating wealth. Consider all the risks and other features before you invest. If you still have doubts, reach out to your financial distributor.
DISCLAIMER
Investment in ELSS is subject to a lock-in period of 3 years from the date of allotment of units. Investors are advised to consult their tax distributor in view of the individual nature of tax benefit. Investors are requested to note that tax laws may change from time to time and there can be no guarantee that the current tax position may continue in the future. The comparison of ELSS Vs other traditional savings instruments has been given for the purpose of the general information only.
Investment in ELSS carries higher risk, does not guarantee returns and any investment decision needs to be taken only after consulting the Tax Consultant or Financial distributor.
Khasnis Prime Wealth Private Limited will not accept any liability/ responsibility/loss incurred on any investment decision taken on the basis of this information.
