ELSS, or Equity Linked Savings Scheme, is a type of tax-saving mutual fund in India. It offers investors the dual benefit of wealth creation through equity investments and tax deductions under Section 80C of the Income Tax Act. ELSS funds invest a minimum of 80% of their assets in equities, making them a suitable option for investors seeking long-term capital appreciation.
Key Features of ELSS Funds:
- Tax Benefits: Investments in ELSS funds qualify for a tax deduction of up to INR 1.5 lakhs under Section 80C of the Income Tax Act. This translates to a potential tax saving of INR 46,800 per year.
- Equity Exposure: ELSS funds invest at least 80% of their corpus in equities, offering the potential for high returns over the long term.
- Lock-in Period: ELSS funds have a mandatory lock-in period of 3 years, ensuring that investors remain invested for a sufficient period to benefit from market growth.
- Market-Linked Returns: The returns generated by ELSS funds are directly linked to the performance of the underlying equities in the portfolio.
- Diversification: ELSS funds typically invest in a diversified portfolio of stocks across various sectors and market capitalizations, mitigating concentration risks.
How Do ELSS Funds Work?
ELSS funds are actively managed by experienced fund managers who select stocks based on in-depth market research and analysis The funds aim to maximize capital appreciation over the long term by investing in a diversified portfolio of equities,
Investments made in ELSS funds are eligible for tax deductions under Section 80C of the Income Tax Act. The maximum deduction limit is INR 1.5 lakhs per financial year. However, the total income earned from ELSS investments is treated as Long Term Capital Gain (LTCG) and is taxed at 10% if the gains exceed INR 1 lakh in a financial year.
Benefits of Investing in ELSS Funds:
- Tax Savings: ELSS funds offer significant tax benefits, making them an attractive option for investors seeking to reduce their tax liability.
- High Growth Potential: Equity investments have the potential to generate high returns over the long term, making ELSS funds suitable for wealth creation.
- Shortest Lock-in Period: Compared to other tax-saving instruments like PPF and NSC, ELSS funds have the shortest lock-in period of 3 years, offering greater liquidity.
- SIP Investment Option: ELSS funds can be invested in through Systematic Investment Plans (SIPs), allowing investors to invest small amounts regularly and benefit from rupee-cost averaging.
- Professional Management: ELSS funds are managed by experienced professionals who conduct thorough research and analysis to select stocks with high growth potential.
Who Should Invest in ELSS Funds?
ELSS funds are suitable for investors who:
- Seek tax-saving investment options.
- Have a long-term investment horizon (minimum 3 years).
- Are comfortable with moderate risk associated with equity investments.
- Aim to build wealth through capital appreciation.
Comparison of ELSS with Other Tax-Saving Instruments:
| Investment Instrument | Lock-in Period | Expected Returns | Tax Benefit |
|---|---|---|---|
| ELSS | 3 years | High (market-linked) | Up to INR 1.5 lakhs under Section 80C |
| Public Provident Fund (PPF) | 15 years | Moderate (fixed) | Up to INR 1.5 lakhs under Section 80C |
| National Savings Certificate (NSC) | 5 years | Moderate (fixed) | Up to INR 1.5 lakhs under Section 80C |
| 5-Year Tax-Saving Fixed Deposit | 5 years | Low (fixed) | Up to INR 1.5 lakhs under Section 80C |
| National Pension System (NPS) | Up to 60 years | Moderate (market-linked) | Up to INR 1.5 lakhs under Section 80C |
Tax Implications on ELSS Funds:
- Short-Term Capital Gains (STCG): Not applicable as ELSS funds have a mandatory lock-in period of 3 years.
- Long-Term Capital Gains (LTCG): LTCG up to INR 1 lakh per financial year is exempt from tax. LTCG exceeding INR 1 lakh is taxed at 10%.
How to Invest in ELSS Funds:
- Open a Demat account and trading account with a SEBI-registered broker.
- Choose an ELSS fund that aligns with your investment goals and risk appetite.
- Invest through a lump sum or SIP mode, depending on your financial situation.
ELSS funds are a valuable investment option for individuals seeking to save taxes while building wealth through equity investments. With their attractive tax benefits, high growth potential, and relatively short lock-in period, ELSS funds offer a compelling proposition for investors with a long-term investment horizon.
Additional Resources:
- ELSS Mutual Funds – Meaning, Tax Benefits & How to Invest (ET Money): https://www.etmoney.com/learn/mutual-funds/elss-mutual-funds/
- ELSS Funds – What is ELSS Funds & How to Invest in India (Groww): https://groww.in/mutual-funds/equity-funds/elss-funds
Disclaimer:
I am an AI chatbot and cannot provide financial advice. The information provided above is for general knowledge and educational purposes only, and does not constitute professional financial advice. It is essential to consult with a qualified financial advisor before making any investment decisions.
How Do ELSS Mutual Funds Work?
Equity Linked Savings Scheme are diversified equity funds. These funds primarily invest in stocks of listed companies. The stocks are selected from a variety of sectors and market capitalizations (large, mid, and small caps). These funds seek to maximize long-term capital growth. After completing extensive market research, the fund manager selects stocks in order to provide the best risk-adjusted portfolio returns.
Section 80C of the Income Tax Act of 1961 allows for tax benefits on investments made in an ELSS fund. Although the amount that can be invested has no upper bound, a maximum of Rs 1. The IT Act allows for a tax deduction of Rs. 5 lakh. One can reduce their annual tax liability by up to ₹46,800 by putting this money into an ELSS.
Things to Consider Before Investing in ELSS Funds
- Returns on funds: Prior to choosing a fund, assess its track record against that of its rivals and the benchmark to see if it has routinely outperformed both. Good funds typically appear in the top quartiles for extended periods of time, though obviously no fund can be at the top all the time.
- Fund house history: It is advised to select fund houses that have demonstrated strong performance over an extended period of time, such as five to ten years.
- Expense ratio: This shows the percentage of your investment that is allocated to fund management. It is always preferable to choose funds with lower expense ratios since they allow you to have higher take-home returns.
- Financial parameters: To analyze a fund’s performance, you can also take into account a number of parameters, including the standard deviation, beta, alpha, and Sharpe ratio. A fund that has a higher beta and standard deviation is considered riskier than one with a lower beta and standard deviation. Choose funds with a higher Sharpe ratio.
- Fund manager: An essential component of handling your money is the fund manager. In order to choose the best stocks and build a solid portfolio, he or she should be knowledgeable and skilled.
- SIP or lumpsum: Prior to making an ELSS investment, you should decide which investment mode—SIP or lumpsum—you would prefer to use. You can invest a regular amount on a regular basis under the SIP method, usually on a monthly basis. But with the lumpsum approach, you make a sizable investment all at once. Since it allows you to benefit from cost averaging—which allows you to receive higher units during down markets and lower units during up markets—SIP mode is typically regarded as the best choice. However, if you have extra cash, you might also choose to make lump sum investments.
4 Good Reasons to invest in ELSS Mutual Funds | ELSS Mutual Funds for Tax Savings and Investments
FAQ
What is ELSS and how it works?
Is ELSS better than PPF?
Is it good to invest in ELSS funds?
Is ELSS taxable after 3 years?
What are ELSS tax saving 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.
Why should you invest in ELSS?
Moreover, ELSS has the lowest lock-in period amongst all other tax saving avenues. If your mutual fund savings offers tax saving opportunity, along with high investment growth, what more can you ask for. ELSS allows you to save taxes, as investment upto ₹1.5 lakh in these schemes is eligible for tax exemption.
What are ELSS mutual funds?
ELSS mutual funds’ asset allocation is mostly (65% of the portfolio) made towards equity and equity-linked securities such as listed shares. They may have some exposure to fixed-income securities as well. These funds come with a lock-in period of just three years, the shortest among all Section 80C investments. What are the features of ELSS funds?
What are ELSS tax benefits?
ELSS mutual fund is the only category of mutual fund that comes with the tax benefit. Let’s understand in detail about the ELSS tax benefits: As per the Income tax rules, investments in Equity Linked Savings Scheme are eligible for tax deduction under Section 80C.