Equity Linked Savings Scheme

What is ELSS (Equity Linked Savings Scheme)?

ELSS stands for Equity Linked Savings Scheme, is an Equity Mutual Funds. Basically, ELSSs is a mutual fund that helps you avail tax deductions and also gives you an opportunity to grow your money. The major portion of the investment in ELSSs is in equity. This tax-saving mutual funds can be used to save income tax up to Rs. 1 to 1.5 lakh under section 80C of the Indian Income Tax Law.

This fund comes with a lock-in period of three years. It is suitable for investors having a high-risk profile as returns in ELSSs depend on the equity market and there are no fixed returns. You have to do detail research when you invest in an ELSS Fund.

Where to start investing in ELSS?

You can begin your ELSS investment here – PTIC INDIA provides a completely free, paperless, and 100% secure online platform from which you can start, manage, and stop your investments. Start investing in ELSS right now to save on taxes and earn market-beating returns. PTIC INDIA has a team of dedicated and award-winning investment experts that can help you find the best ELSS scheme.

What is ELSS Mutual Funds?

Equity Linked Savings Scheme or ELSS Funds is an open-ended Equity Mutual Funds that help you save and provide an opportunity to grow money. When almost all equity funds restrain you from paying long-term capital gains tax of 10.4% up to an amount of Rs. 1 lakh, ELSS mutual funds offer tax benefit. That’s why these MF funds are also known as tax saving mutual fund schemes. By investing in ELSS, you can save tax up to Rs. 1.5 lakh as per the Section 80C of IT( Income Tax) Act.

The only catch is here is best ELSS funds comes with a lock-in-period of 3 years. That means every instalment you make towards ELSS is subject to 3 a year-lock-in.

Who should invest in ELSS Mutual Funds?

ELSS funds are chosen by investors who are willing to take risks as these investments are equity oriented. Since there is a risk of volatility, it is advised that you invest for a longer duration as compared to the lock-in period of 3 years.

People nearing their retirement could opt for other tax savings investments like PPF or NSC as they are less volatile. However, people who have just started their career and can invest for a long period of time can opt for the more riskier ELSS funds which would give higher returns compared to others.

Look at these points before investing ELSS:

Perform for a long-term or low-risk investment

Fund details like fund invest approach, the expense ratio of the fund & how volatile the fund has been in the past.

Tax saving Mutual Fund Schemes

Benefits of ELSS

Earns the highest possible returns offered by any tax saving investment (as proven by historical ELSS performance data). The lowest lock-in period of 3 years among all other tax saving investments. Helps during online income tax e-filing as all the details are made available online as well.

Tax Savings

Amount invested in an ELSS fund is available for a tax deduction to the extent of ₹150,000 for the current financial year under section 80C of the Income Tax Act. This is the only scheme which allows investors to save on tax while earning high returns from investment in equity funds.

Lowest lock-in period among other tax saving funds:

ELSS has a lock-in period of only 3 years, as compared to minimum of 5 years for other tax saving options. This period is the lowest in comparison to other tax saving options such as 15 years in a PPF or 5 years in a Fixed Deposit option. Thereby ELSS provides higher returns with the lowest lock-in period.

Lower Tax on Gains

An ELSS fund is invested for a minimum period of 3 years. Any gains from the sale of ELSS funds are therefore long-term in nature.

According to the present law, gains above ₹ 1,00,000 shall be taxable at the rate of 10%. In contrast, short-term capital gains are taxed at a rate of 15%. Thus, ELSS funds entail lower tax expense automatically.

The Benefit of Compounding

It is generally advised to invest in equity funds for a long time horizon, spanning 5-10 years. ELSS funds by virtue of the lock-in period bring about a disciplined long-term investment by default. In this process, it helps the investors benefit from the power of compounding in the long-run.

Redemption not Compulsory After 3 Years

If the investors are happy with the returns from the respective ELSS fund, they may choose to continue. Redemption is not compulsory after a period of 3 years. It is only a minimum investment duration, however, there is no maximum investment duration.

Higher Returns

Since ELSS funds invest in equity schemes, the returns are higher (15-20%) compared to other tax saving options (generally, 7-10%).
Over a 3 year period, the benefit of compounding coupled with returns from equity provides higher returns for investors.

SIP Option Available

While investing in ELSS, investors may choose to go with the SIP option. It allows the investor to invest a fixed amount at regular/ periodic intervals.
This allows the salaried class to invest a fixed sum from their savings periodically, generally each month.

Safe and transparent

Investing in mutual funds is very transparent. All mutual funds companies come under the purview of SEBI and they need to make necessary disclosures.