NEW DELHI, Mar 26
Tax saving is among the primary objectives of financial planning, especially for investors following the old tax regime. As we near the end of the tax-filing season, many of you may be on the lookout for investments that blend tax benefits with wealth creation.
One such instrument that can help you achieve both these goals is the Equity Linked Savings Scheme or ELSS, a mutual fund that invests primarily in equity or equity-related securities. Let’s look at the most notable aspects of ELSS funds so you can decide whether they’re right for you.
- What is an ELSS Fund?
ELSS funds are diversified equity mutual funds designed for tax-saving and wealth creation. These funds typically have a 3-year lock-in period and invest 80% of their assets in equity and equity-related instruments. They are multi-cap, which can help in risk mitigation and provide stability to your portfolio. Being market-linked, they are subject to market risk, but may offer potentially higher returns compared to traditional tax-saving instruments like National Savings Certificate (NSC) or Public Provident Fund (PPF). - Understanding the Lock-in Period
ELSS fund units are subject to a 3-year lock-in period only after which can the purchased units be sold or redeemed. While this may lower the liquidity factor of the investment, the lock-in period can encourage a disciplined investing habit.
For example, you invest Rs.10,000 in an ELSS fund via a systematic investment plan (SIP) in April 2024 for three years. In this case, units will be purchased each month until the end of the 3-year lock-in period. i.e., until March 1, 2027. So, if you want to redeem all your accumulated units in one go, you will have to wait until March 1, 2030, to do so. - Tax benefits of ELSS Funds
Investments in ELSS funds are eligible for tax deduction under Section 80C of the Income Tax Act. The maximum deduction available is up to Rs.1.5 lakh per financial year, on taxable income. - How much can you invest in ELSS?
You can start an ELSS investment with as low as Rs.500 a month, and there is no upper limit to how much you can invest. However, investments up to Rs.1.5 lakh per year are eligible for a tax rebate u/S 80C. So, if you’re investing in ELSS with the aim of saving tax, choose an amount based on your investment strategy. Additionally, if you want to increase your cumulative investment, ELSS allows for a single-time lump sum contribution. - Tax on capital gains
ELSS funds typically offer long-term gains. However, capital gains above Rs.1 lakh in a financial year are subject to long-term capital gain (LTCG) tax of 10%. Any gains earned up to Rs.1 lakh in a financial year are exempt from LTCG tax. This is a primary factor that makes ELSS funds an attractive option for optimising ones tax liabilities. For instance, if your ELSS gains in one financial year are Rs.1.1 lakh, LTCG tax will be levied only on Rs.10,000, which is the amount more than Rs.1 lakh. Thus, you will be charged an LTCG tax of 10% on Rs.10,000, which comes to Rs.1,000. - Mode of investment
You can invest in ELSS via SIP or a lump sum investment. SIP offers the benefit of rupee cost
averaging, allows you to create a substantial investment over time, and helps alleviate the overall risk involved. The lump sum investment may be ideal when you have a boost in income, and do not have any immediate need for the spare funds. - Selecting the right ELSS fund
ELSS funds are an excellent wealth creation tool, most suited to an investment horizon of at least 5 years. But not all ELSS funds are the same. Some are large-cap oriented while others may have higher small and mid-cap exposure. Look at factors like the fund’s asset allocation, historical performance, expense ratio, and the fund manager’s performance before investing in a fund.
Whether it is wealth creation, fulfilling a life goal, or retirement planning, ELSS funds have the flexibility to align with your life goals. Before investing, assess the objective of your investment to create a customised investment strategy that helps you achieve that goal.
