With Equity Linked Savings Schemes (ELSS) funds, you can build wealth while reaping tax benefits in India. Under Section 80C of the Income Tax Act, ELSS funds combine the potential for high returns with tax savings. The following is an explanation of ELSS and how to invest in them.
What is the ELSS Fund?
The ELSS funds invest a large portion of their corpus in equity or equity-related instruments. ELSS funds are also called tax saving schemes since they exempt up to Rs.150,000 from your annual taxable income under Section 80C.
It is an equity-oriented fund with a three-year lock-in period. In recent years, many taxpayers have turned to ELSS schemes to reap tax benefits. ELSS schemes allow you to take advantage of tax exemptions up to Rs. 150,000 on the invested amount. Furthermore, if your income exceeds Rs. 1 lakh, you’ll have to pay a 10% tax on your long-term capital gain (LTCG) at the end of the three years.
How Does ELSS Funds Work?
An ELSS fund is an equity fund with a diversified portfolio of securities. The funds invest primarily in stocks of publicly traded companies. The stocks are selected from a variety of market capitalizations (large, mid, and small companies) and industries.
The objective of these funds is to maximize long-term wealth appreciation. To achieve the optimum risk-adjusted portfolio returns, the fund management conducts extensive market research before selecting stocks.
Features of ELSS Fund
ELSS funds have the following features:
- A minimum of 80% of the total investable corpus is invested in equity and equity-related instruments
- ELSS fund investments are diversified across market capitalizations, themes, and sectors.
- In the ELSS fund, there’s no maximum tenure for investments. However, there’s a three-year lock-in period.
- The income tax exemption under Section 80C applies to the invested amount.
- Income is treated as long-term capital gains and taxed accordingly.
- These are open-ended mutual funds. In other words, you can redeem your units anytime after the lock-in period has ended.
- The ELSS mutual fund scheme can also be invested in through a Systematic Investment Plan (SIP). With SIP, you can make a disciplined investment in ELSS mutual funds and reap the long-term benefits.
How to Invest in the ELSS Fund?
Here are the steps you need to follow to invest in ELSS:
Step 1: On the ELSS fund app, select an ELSS fund based on your risk tolerance and financial goals.
Step 2: Complete the KYC (Know Your Customer) process with a registered mutual fund distributor or online platform.
Step 3: Decide whether you want to make a lump sum investment or a systematic investment plan.
Step 4: Provide the required documents, including a PAN and Aadhar card.
Step 5: Complete the ELSS fund application form.
Step 6: The required amount can be invested through a bank transfer or online payment.
Step 7: As an investor, you must understand and acknowledge the three-year lock-in period for ELSS investments.
Step 8: Make sure you monitor your investments and review them periodically.
Step 9: After the lock-in period, decide whether to redeem or continue investing.
Benefits of Investing in the ELSS Fund
Benefits of ELSS funds include:
- Diversification: ELSS funds typically invest across a variety of sectors and companies, ranging from small cap to large cap. As a result, your investment portfolio becomes more diversified.
- Minimum investment: The ELSS schemes allow investors to begin investing with as little as Rs.500. This makes investing easier since a reasonable corpus is not required to start investing.
- Systematic Investment Plan (SIP): ELSS schemes allow investors to invest a lump sum amount. However, most prefer to invest over time in SIPs so that tax benefits can be reaped as well as an opportunity to grow wealth.
You are also permitted to invest as much as you wish but can avail of tax benefits as limited by Section 80C of the Income Tax Act. Moreover, you can remain invested after the stipulated lock-in period of 3 years for as long as you like.
Conclusion
ELSS funds offer a unique investment opportunity in India, as they combine the potential for wealth creation with significant tax benefits under Section 80C. These funds invest mainly in stocks and equity-related instruments, with the aim of long-term capital appreciation while diversifying across market segments. An ELSS fund app allows investors to choose from a range of ELSS schemes, make investments conveniently, and track their investments’ performance over time. Overall, ELSS funds are attractive investment options for tax savings and provide the potential to create wealth through equity exposure. To make informed decisions about ELSS funds, investors need to understand their financial goals and risk tolerance.
Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.
Past performance may or may not be sustained in future.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
ELSS Investments are subject to a 3-year lock in period and are eligible for Tax Benefit under section 80c of Income Tax Act, 1961.
“As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab.
Finance Act, 2020 has announced a new tax regime giving taxpayers an option to pay taxes at a concessional rate (new slab rates) from FY 2020-21 onwards. Any individual/ HUF opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions. Since, individuals/ HUF opting for the new tax regime are not eligible for Chapter VI-A deductions, the investment in ELSS Funds cannot be claimed as deduction from the total income.
Investors are advised to consult his/her own Tax Consultant concerning the specific amount of tax and other implications arising out of his/her participation in ELSS”
Market caps are defined as per SEBI regulations as below: a. Large Cap: 1st -100th company in terms of full market capitalization. b. Mid Cap: 101st -250th company in terms of full market capitalization. c. Small Cap: 251st company onwards in terms of full market capitalization.
