What is ELSS? A small guide to equity linked savings

One of the biggest advantages of investing in mutual funds is the fact that there are schemes to suit every type of investor. Regardless of your investment horizon or the capital available at your hands, there are different types of mutual fund schemes to match your investment goals. Another great benefit of mutual funds schemes is that they help you save taxes.

Popularly known as tax-saving funds, Equity Linked Savings Schemes (ELSS) are eligible for income tax deduction under Section 80C of the IT Act.

WHAT IS ELSS?

Equity Linked Savings Scheme is a type of diversified mutual fund in which most of the fund has an exposure in the equity market, and a small part of the investment is made in the debt market. Just like other types of mutual funds, an investor can either invest a lump sum amount in an ELSS fund of their choice or start a SIP. These funds have a lock-in period of 3-years, and an investor must remain invested throughout this period to claim the tax deduction.

TAX SAVING WITH ELSS

As mentioned above, ELSS funds are eligible for a tax deduction as per the IT Act, Section 80C. A maximum deduction of up to Rs. 1,50,000 is allowed in a financial year by investing in these funds. With the majority of the investment in equity, ELSS funds are known to offer the dual benefits of long-term wealth creation and tax benefits.

Note that the tax benefits will be reversed if an investor withdraws the ELSS investment before the mandatory lock-in period of 3-years.

TAX SAVING WITH ELSS SIP

Many ELSS investors often get confused about how to claim a tax deduction if they have started a SIP in an ELSS fund. However, if you invest a lump sum amount or start a SIP in ELSS, the maximum deduction will be Rs. 1,50,000 in a financial year.

It is up to you whether you want to invest Rs. 1.5 lakhs at once or invest Rs. 12,500/month for 12 months. You are eligible for a tax deduction in both cases as per Section 80 of the IT Act. But do note that the lock-in period of every SIP will be 3-years from when you invest the amount.

BENEFITS OF INVESTING IN ELSS

• Tax deduction under section 80C of up to Rs. 1,50,000 per year

• Lower lock-in period and higher return potential in comparison to other 80C investment options such as Tax-saving FD, PPF, NPS, and NSC

• Freedom to invest a lump sum amount or start SIP with as little as Rs. 1,000/month

• Dividend option if you want to earn a regular income from your ELSS investment

• Professional fund managers make investment decisions on behalf of the investors

SHOULD YOU INVEST IN ELSS?

ELSS mutual funds are generally recommended for individuals who want to save income tax and are aiming for long-term financial growth. Remember that while these funds have higher equity exposure, they are prone to high volatility and are not recommended for investors looking for stable returns.