Save Tax

Equity Linked Savings Scheme (ELSS), as the name suggests, are the mutual fund schemes that invest in equities. This investment option has the least lock-in period of 3 years amongst all tax-saving options. ELSS offers tax benefits to the investors as the investments made under this scheme are eligible for a tax deduction under Section 80C of the Income Tax Act up to a maximum amount of Rs. 1.5 lakhs. An investor should choose an ELSS fund according to his/her financial goals and risk appetite. As these funds invest in equities, it gives an experience of equities to the investors who have lately started investing and encourages them to invest in other equity-oriented mutual funds. ELSS funds are available in two options

Many investors make the mistake of investing in ELSS late in the financial year. Investing early in the year will help earn a higher return on the entire amount throughout the year. A good tax-saving investment is an investment first and a saving solution later. After completion of the 3 year lock-in period, if the fund has underperformed, an investor can continue to stay invested in the fund. An investor can exit the scheme as and when the market rises and the NAV of the scheme increases.

An investor can invest in this tax saving instrument via both lump sum and monthly Systematic Investment Plan (SIP). If an investor invests via the SIP route, there are better chances of beating the market volatility and averaging the cost of investment. Investments through SIP are flexible, convenient, and also inculcates financial discipline. However, if an investor invests a lump sum amount in ELSS, there is a fair chance that he can enter the market at the wrong time.
Therefore investors should keep a tab of their taxes just as they keep a tab of their health and ELSS is a smart way to save taxes and earn yields.

Frequently Asked Questions (FAQs):

1. What are the tax implications of ELSS?

From a tax standpoint, Long term capital gains (LTCG) up to Rs.1 Lakh are tax-free in ELSS schemes. LTCG over and above Rs. 1 lakhs is taxed at a flat rate of 10%. An investor can also claim a deduction of Rs.1.5 lakhs under section 80C of the Income Tax Act.

2. What are the risk factors associated with ELSS?

ELSS schemes are suitable for investors who have a higher risk appetite. ELSS funds majorly invest in equities but if these funds are compared with other equity-oriented mutual funds, they are safer because the volatility is much lower. As this investment option carries higher risk, their return generating potential is also higher.

3. Why is ELSS a better choice than traditional tax savings instruments?

The biggest advantage of investing in ELSS is that it provides the lowest lock-in and good average returns as compared to the traditional tax savings instruments. Let us understand: