Category : New to Investing December 19, 20235 minutes read
No matter who we are and what our income is, we all want to save taxes. What if we could combine tax-saving with wealth creation? One of the best ways to do this is to invest in Equity-Linked Savings Schemes or ELSS, a mutual fund that helps you achieve both these goals. Equity Linked Savings Scheme Funds, is a tax-saving mutual fund scheme under Section 80 (C) of the Income Tax Act 1961. Investors can claim a deduction of up to Rs. 1,50,000 from their taxable income. In this guide, we will walk you through what is ELSS, potential risks associated with this investment and how ELSS compares to other tax-saving schemes.
In layman’s terms, ELSS is a tax-saving tool that primarily invests in equities. It gives a tax benefit of up to Rs. 1,50,000 under section 80C of Income Tax Act, 1961
The long-term capital gains from ELSS above Rs.1,50,000 are taxed at 10%, while up to Rs. 1,50,000 are eligible for tax deductions.
Investors can redeem all ELSS units after three years in one go or partly. Investors can opt to stay invested and potentially benefit from earning returns in the long-term.
Yes, like other equity mutual funds, ELSS are high-risk investments. The risks depend on the performance of underlying securities and market-linked instruments.
ELSS is an Equity Linked Savings Scheme primarily used for tax deductions purposes u/s 80C of IT Act, 1961. On the other hand, SIP is a mode of investment via which an investor can invest in ELSS or any other fund of their choice. SIP is preferred for investors who like periodic investing. It gives the investors an option to invest weekly, monthly or quarterly
Yes, you can claim a tax deduction on ELSS every year based on the amount you’ve invested under Section 80 C of the Income Tax Act of 1961. The maximum claim can only be up to Rs. 1.50.000.
There is no yearly limit for ELSS but one claim tax deduction only up to Rs. 1,50,000 under section 80 C of Income Tax Act, 1961
The difference between ULIP and ELSS is that ULIP is the combination of investment offered by life insurance companies and life insurance. ELSS, on the other hand, is an equity mutual fund.
Introduction
Gone are the days when investing in mutual funds and saving taxes were a distant game.
Do you know the assets under management (AUM) of the Mutual Fund Industry in India stood at Rs. 46,37,565 crore * as on July 31, 2023
With the rise in the popularity of mutual funds and investment awareness, more and more investors are trying their luck with funds like ELSS. So, what is an ELSS mutual fund?
Let us help you understand about ELSS in detail today. We’ll include the different aspects and information related to what is ELSS in different chapters for you, including information on what ELSS mutual funds are, ELSS tax benefits, ELSS lock-in period, ELSS risk, ELSS returns, among others.
ELSS, or Equity Linked Savings Scheme Funds, is a tax-saving mutual fund scheme under Section 80 (C) of the Income Tax Act 1961. It invests a significant corpus share in equity-related instruments. The ELSS lock-in period is three years.
So what’s more to what tax-saving mutual funds are? ELSS enables users to claim a deduction of up to Rs. 1,50,000 from their taxable income. These funds allow investors- HUF and individuals, to save taxes under Section 80 (C) of the ITA, 1961.
Looking to invest in ELSS Mutual Funds to save tax?
Features of ELSS:
- ELSS is a mutual fund that invests primarily in equities – a minimum of 65% of its portfolio.
- ELSS offers twin benefits of wealth creation and tax savings.
- There is no cap on the amount of investment while the minimum amount varies from one fund house to another.
- ELSS lock-in period is three years without any option of premature exit.
- ELSS, under 80(C) of the Income Tax Act, 1961, offers deductions up to Rs. 1,50,000 per annum.
Diversified equity funds such as ELSS invest in different companies irrespective of sector and size. They aim to offer maximum gains for investors while diversifying investments across the stock market. These funds suit the needs of the investors with long-term goals.
Hence, investors looking for retirement planning, a child’s education, or marriage go for these funds. The key benefit of diversified equity funds is offering benefits to investors from the financial growth of businesses from different sectors and industries.
The potential benefits of ELSS funds include all advantages of SIP, like payment flexibility, rupee cost averaging, and power of compounding. ELSS tax savings can be started with a minimum amount of Rs. 500.
It is the only mutual fund offering tax-saving benefits. Apart from ELSS tax benefits, it is an equity-oriented fund that offers investors potentially high returns after the three year lock-in period expires. On average, ELSS instruments have provided a return of 12%**. It is the highest out of all the tax-saving assets.
The Process of Investing in ELSS Funds
After knowing what tax-saving mutual funds are, the process to start investing in ELSS is easy and short.
- Investors can quickly complete the KYC verification. It involves sharing documents like valid address proof, PAN card details, and photos in the respective format.
- Select the mode of investment. You can choose between SIP or lumpsum investment mode.
- Then go ahead with the investment option. You can activate ECS (Electronic Clearance Service) on your bank account for seamless use.
It is essential to note that investors must ensure their amount will be locked in for at least three years in ELSS.
Save Tax by Investing in ELSS funds now!
Who Can Invest in ELSS Funds?
ELSS is ideal for investors looking for:
- Investment-cum-tax savings
Investors looking for investment-cum-tax savings mutual funds can invest in ELSS confidently.
Professional investors who seek a short-term investment for a lock-in period of three years prefer ELSS. Many refer to ELSS as tax-saving SIP.
- Calculated risks
In your search for what ELSS is, investors who are not worried about risks and want to take calculated risks, prefer ELSS. Hence, seasoned investors looking to take ELSS risks and ready for a lock-in period of three years are ideal investors.
- Diversify investments
Investors who look for diversifying and balancing investments can go for ELSS funds and unlock the benefits of ELSS funds.
Read more about the benefits of portfolio diversification..
ELSS funds are a type of diversified equity fund as they diversify their investments across the stock market. ELSS tax benefits are significant; investors can claim deductions up to Rs. 1,50,000. ELSS funds are suitable for investors investments-cum-tax saving schemes. Moreover, investors who are willing to take calculated risks and have a higher risk-tolerance may be better suited to invest in ELSS funds. Lastly, investors seeking to diversify their investments may potentially benefit from ELSS funds.
After understanding briefly what is ELSS, it is necessary to understand the potential risks of ELSS.
ELSS Risks:
- High equity exposure.
Although ELSS combines the benefits of tax savings and investments, equity is a high-risk asset class.
- Market risk
ELSS risks are high as these schemes require holding at least 65% of portfolios in equity instruments only. This makes ELSS vulnerable to market risks.
- Liquidity risk
ELSS lock-in period is three years, increasing the liquidity risk as no investment decisions are possible during this time.
Points to consider before investing in ELSS funds:
In this quest of learning what is ELSS, you should remember the key points before investing in these funds. The key topics related to ELSS include fund returns, the history of the fund house, expense ratio of ELSS funds, financial parameters, and fund manager.
- Comparison with other options
Investors must compare the ELSS returns with the other available options. It helps them select the best ELSS mutual funds from all available options.
Learn more about how to save tax in India!
- Expense ratio
The expense ratio of ELSS funds indicates how much of the investment is used in managing the funds. So, along with ELSS tax benefits, it is recommended to go for the ELSS with a low expense ratio which indicates potentially high take-home returns.
ELSS funds are classified as high-risk investments due to their high exposure to equity. These funds are also vulnerable to market risks and volatility. Lastly, ELSS funds have a lock-in period of 3 years, which makes them vulnerable to liquidity risks. Investors must analyse their risk-appetite, other mutual fund options and the expense ratio of the fund before investing.
Moving ahead, are you ready for some quick comparisons? What is the difference between ELSS and mutual funds? There is none. ELSS are a type of mutual funds; however, ELSS can be differentiated with other tax-saving instruments. Below is a quick comparison of ELSS funds with other tax-saving instruments:
| ELSS Funds | NSC | NPS | 5-YR FD^ | PPF | |
| Definition | ELSS is a tax-saving fund focusing majorly on equities. | It is a tax-saving fixed investment that one can open from any post office. | It is a government-sponsored pension scheme that helps investors save for the future in a pension account. | It is a tax-saving fixed investment for five years. It is available in banks and post offices. | One of the most popular tax saving and investment schemes for long-term investors. |
| Returns | 15-18%* | 7-8%* | 8-10%* | 4-6%* | 7-8%* |
| Lock-in period | 3 years | 5 years | Till retirement | 5 years | 15 years |
| Tax on returns | Partially taxable | Yes | Partially taxable | Yes | No |
*Returns depend on market performance and scheme chosen
Source: PPF, NSC data from India post, Tax Saving Fixed Deposit rate from SBI website
Claim deductions up to Rs. 1,50,000 by investing in ELSS
Hence, after understanding what is ELSS, the difference between ELSS and mutual funds, these may be better suited to some investors in comparison to NSC, NPS, 5 Year FD and PPF based on returns and lock-in periods. For investors looking for short-term investments, can invest in ELSS considering the shorter lock-in period.
Moving ahead, investors have three options to invest in ELSS funds. These are:
- Growth option
The first way is the growth option offering gains only at the time of redemption. In this option, the profits multiply as the investor doesn’t get benefits in the form of dividends as these are reinvested.
The point of concern here is that the returns in the growth option are prone to current market risks.
- Dividend option
Further, while understanding what ELSS is, the second way is to use the dividend option. In this option, investors are eligible for time-to-time benefits in the form of dividends. However, these dividends are liable for tax according to existing tax slabs.
- Dividend reimbursement option
The third way is to go for the dividend reimbursement option. In this option, investors can quickly reinvest the dividends received into additional shares to add them to NAV. It suits the upswing markets.
- ELSS is a tax-saving mutual funds scheme. Investments in ELSS can be made via Systematic Investment Plans (SIP) or lumpsum.
- Using ELSS, investors can claim a deduction of Rs. 1,50,000 from total taxable income.
- The key benefits of ELSS funds include payment flexibility, rupee cost averaging, and the power of compounding.
- ELSS funds can be invested using growth, dividend, and dividend reimbursement options.
- ELSS funds are prone to market volatility and investors are requested to take risks after reading all the terms and conditions.
