ELSS stands for Equity Linked Savings Scheme. ELSS funds are a type of diversified equity linked mutual fund savings schemes which qualify for tax exemption under section 80C of the Income Tax Act.
It offers the dual advantage of
- capital appreciation and
- tax benefits.
Tax benefit Angle of ELSS funds
- One can save income tax of up to Rs 1.5 lakhs under Section 80C of the Income Tax Act by investing in ELSS Funds.
- The returns generated on the investments are also tax-free in the hands of the investor after completion of the 3 year lock-in period.
The ELSS investment tenure
- ELSS funds have a lock-in of 3 years.
- ELSS funds do not allow premature redemptions before completion of the 3 year lock-in period, as per income tax regulations
- The investor can stay invested in an ELSS fund, even after the lock-in period of 3 years with or without further contributions for as long he/she wants.
How to invest in ELSS funds?
- One can invest in ELSS through the fund company’s website.
- Investments can be made in lump sum and through Systematic Investment Plans (SIP).
- Each SIP is considered to be a fresh investment and every individual SIP carries a lock-in of 3 years.
- In case of SIP investments, redemptions can be done on a first-in-first-out basis since each individual SIP has a lock-in of 3 years.
The ELSS investment limit
- The minimum amount of investment of ELSS fund is Rs 500.
- There is no upper limit with regard to investment in ELSS funds, but tax-saving benefit can be availed on only a maximum of Rs 1.5 lakh a year.
The Risk factor and Returns in ELSS funds
- ELSS funds do not guarantee fixed returns and are dependent on the overall performance of equity markets.
- However, past records have shown that the best performing funds have displayed the capability of generating inflation beating returns over the long-term.
- The returns from individual funds vary because each fund has a different portfolio.
Who can invest in ELSS funds?
- Individuals as well as HUFs can invest in tax-saving mutual funds.
- At present, most mutual fund companies do not accept investments from NRI Citizens of USA and Canada.
- NRIs living in other countries can invest in ELSS funds.
Growth and Dividend plan options of ELSS funds
The growth option is the plan aiming for long-term wealth creation.
Under the dividend option, the investor can choose between dividend payout or dividend reinvestment. The dividend received will not be taxable. If one chooses dividend reinvestment, it will be treated as a fresh investment and tax benefits can be claimed on it as well.
Why ELSS funds are better than other tax-saving investments
Higher returns over the long-term
ELSS funds invest in stocks and have the highest equity allocation among tax-saving investments. Equity is an asset class that has the capacity to beat inflation. Thus ELSS funds are best placed to earn inflation-beating returns when compared to other popular tax saving options like NSC, PPF and VPF. No doubt, ELSS funds score over traditional tax saving products by way of providing high returns and tax saving benefits.
Lowest lock-in period
Traditional tax-saving investments have long lock-in periods. PPF has a lock-in period of 15 years while NPS requires one to stay invested till retirement.
ELSS funds come with a lock-in period of only 3 years. This is a big plus to the investor since money is not getting blocked for long periods. Also one has the option to even stop investing if there is no further reason to invest or if a fund is not doing well enough after the lock-in period of 3 years is over.
Table showing how ELSS funds stand in comparison to other tax-saving investments
**There is no upper limit on investments. However, investments of only up to Rs.1,50,000 per year are allowed to be claimed as deductions under Section 80C of IT Act
The above comparison of ELSS with other tax savings instrument has been given for the purpose of the general information of the investors. ELSS is suitable for all types of investors who are not risk averse and need to invest in tax planning instruments. Investment in ELSS funds do carry some amount of risk and it is advisable to consult the Tax Consultant or Financial Advisor to arrive at a proper investment decision.
Debalina Roy Chowdhury