An ELSS is an Equity Linked Savings Scheme, that allows an individual or HUF a deduction from total income of up to Rs. 1.5 lacs under Sec 80C of Income Tax Act 1961.
Thus if an investor was to invest Rs. 50,000 in an ELSS, then this amount would be deducted from the total taxable income, thus reducing her tax burden.
These schemes have a lock-in period of three years from date of units allotment. After the lock-in period is over, the units are free to be redeemed or switched. ELSS offer both growth and dividend options. Investors can also invest through Systematic Investment Plans (SIP), and investments up to ₹ 1.5 lakhs, made in a financial year are eligible for tax deduction
Investors look for investment opportunities that can help them generate wealth, get regular returns, and/or save taxes. While there are numerous investment schemes available in the market, most of them offer returns that are taxed according to the Income Tax rules. This is where ELSS funds step in. Equity Linked Savings Scheme or ELSS Funds are tax-saving equity mutual funds. Here, we will explore ELSS Tax Saving Mutual Funds and talk about all the aspects that you need to know about them.
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What is ELSS Fund?
ELSS funds are equity funds that invest a major portion of their corpus into equity or equity-related instruments. ELSS funds are also called tax saving schemes since they offer tax exemption of up to Rs. 150,000 from your annual taxable income under Section 80C of the Income Tax Act.
As the name suggests, an ELSS fund is an equity-oriented scheme with a mandatory lock-in period of three years. In recent years, many taxpayers have turned to ELSS schemes to avail of tax benefits. If you invest in ELSS schemes, then you can avail tax exemption of the invested amount up to a limit of Rs. 150,000. Further, the income that you earn under this scheme at the end of the three-year tenure will be considered as Long Term Capital Gain (LTCG) and will be taxed at 10% (if the income is above Rs. 1 lakh).
Features of ELSS Mutual Funds
Some important features of ELSS funds are as follows:
A minimum of 80% of the total investible corpus is invested in equity and equity-related instruments
The fund invests in equity in a diversified manner – across different market capitalizations, themes, and sectors.
There is no maximum tenure of investment. However, there is a lock-in period of three years.
Tax exemption on the invested amount under Section 80C of the Income Tax Act.
Income is treated as LTCG and taxed according to the prevalent tax rules.
What are the tax benefits offered by ELSS Mutual Funds?
As mentioned above, Section 80C of the Income Tax Act offers tax deduction benefits on the principal invested by you in an ELSS scheme. The is a cumulative deduction benefit which means that you can avail a tax deduction of up to Rs. 1.5 lakh under the above-mentioned section for investments made in all instruments specified like ELSS, NSC, PPF, etc.
Further, these schemes have a mandatory lock-in period of 3 years. Therefore, on redeeming the units, you receive long-term capital gains or LTCG. These gains are not taxable up to Rs. 1 lakh in one financial year. Any LTCG above this limit is taxed at 10% of the gains exceeding Rs. 1 lakh without indexation.
Why should you invest in ELSS Tax Saving Mutual Funds?
ELSS Tax Saving Funds offer a wide range of benefits including:
Diversification – Most ELSS funds invest across a diverse group of companies ranging from small-cap to large-cap and across various sectors. This allows you to add the element of diversification to your investment portfolio.
Low minimum amount – Most ELSS schemes allow investors to start investing with as low as Rs.500. This ensures that you start investing without having to accumulate a reasonable investible corpus.
SIPs – While you can invest a lump sum amount in an ELSS scheme, most investors prefer the SIP method as it allows them to invest in small amounts and avail tax benefits along with an opportunity to create wealth.
Additionally, you can invest as much as you want but can avail tax benefits as limited by Section 80C of the Income Tax Act. Also, you can choose to stay invested after the stipulated lock-in period of 3 years for as long as you want.
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