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Saving Tax Through ELSS - Tax Benefits of ELSS Funds

ELSS or Equity Linked Saving Scheme qualify for tax deductions under Section 80C of the IT Act. So, what is ELSS and why is it one of the best forms of tax-saving investment. Read on to find out.

Introducing ELSS Fund

Tax-planning and consequently, financial planning is paramount for all. Tax-planning can help you save a considerable amount every year by investing in schemes that qualify under Section 80C of the IT Act. One such option is investing in ELSS. It is the only type of mutual funds that are eligible for tax deductions and offers better benefits out of all the investment options that are eligible for tax benefits under Section 80C. So here are some things you should know about ELSS and the benefits of the same:

What is ELSS?

ELSS is a type of tax-saving mutual fund investment. In ELSS, the majority of the money that you invest is invested in stocks and shares of the company, i.e. equity investments. The rest of the money could be invested in safer fixed income securities like treasury and corporate bonds. You can opt to receive dividends from the funds periodically or growth option where the profits and gains are reinvested. Like other equity-based investments, one of the significant benefits of ELSS mutual funds is high returns potential.

Tax Benefits of ELSS Funds

Under Section 80C, investments in ELSS can be shown as a deduction to reduce your taxable income by up to Rs. 1.5 lakhs. For example, if your net taxable income is Rs. 15 lakh by the end of the year, investing in ELSS can reduce that by up to Rs. 1.5 lakh. This will reduce your net taxable income to almost Rs. 13.5 lakh depending on how much you invest in ELSS. Also, this can bring down your tax liability by up to Rs. 46,800. Apart from tax-exemption of the funds invested in ELSS, ELSS tax benefits also include exemption of returns on investment from tax if it is less than Rs. 1 lakh. If all this seems confusing to you, let us take a look at an example:

Let us assume, Mr. Ravi earns Rs. 12 lakhs per annum. He thus falls into the 30% income tax category with additional 4% cess for health and educational purposes. So, the effective rate of taxation for Ravi would be (30 + 4% of 30%), i.e. 31.2%.

Now, Ravi invests Rs. 1.5 lakh in ELSS. This would bring down his net taxable income to Rs. 10.5 lakh. Thus, Ravi effectively gets an exemption of Rs. 46,800 (31.2% of Rs. 1.5L) on taxes.

Moreover, since these ELSS funds come with a 3-year lock-in period, they are considered as long-term investments. Thus, his long-term capital gains would also be exempted from taxes provided it is less than Rs 1 lakh. Gains above Rs 1 lakh in a year will be taxed at 10%.

Apart from saving on taxes, some other benefits of ELSS funds are:

High Return Potential

Since a major portion of the investments is made in equity, they carry high return potential. However, they also come with high-risk quotient.

Inculcates Discipline

Since ELSS mutual funds come with tax benefits, this type of fund is investors' preferred choice of investment to add to their portfolio. Moreover, the investment can be done via SIPs or Systematic Investment Plans i.e. money can be invested at regular intervals instead of one lump-sum payment. This helps in inculcating investment discipline, especially among new investors.

Low Lock-in Period

One of the best ELSS benefits is that it comes with the lowest lock-in period of 3 years as compared to 5 years of FD, 15 years of NPS and PPF, etc.

Choosing the Right ELSS Funds

Make sure you check the track record of the fund manager of the ELSS scheme before investing in the same. Choose a fund that matches your risk profile. You can also visit a trusted site that offers financial services to compare between the different ELSS schemes available, help you set financial goals and guide you with the investments you want to make. Lastly, always go through the documents and contracts carefully and make sure you don't do it in a rush.