One of the biggest USPs of investing in mutual funds is the fact that there are schemes to suit every type of investor. No matter if you are aiming for long-term wealth creation or stable returns, there are different types of mutual fund schemes to match your investment goals. Moreover, there are schemes to 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. Let us have a detailed look at what is ELSS funds and their tax benefits.
Equity Linked Savings Scheme is a type of diversified mutual fund. While the schemes have maximum exposure in equity and equity-related instruments, a 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.
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.
But note that the tax benefits will be reversed if an investor withdraws the ELSS investment before the mandatory lock-in period of 3-years.
A lot of ELSS investors often get confused about how to claim a tax deduction if they have started a SIP in an ELSS fund. But no matter 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.
As ELSS mutual funds are equity-oriented funds, they are taxed as any other equity fund. LTCG of 10% without the indexation benefit is applicable when you redeem your ELSS investment after the lock-in period of 3-years and your gains for the year are above Rs. 1 lakh.
But as ELSS funds have excellent long-term wealth creation potential, most investors generally do not redeem their investment even after the lock-in period.
pTax 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
Now that you know what is ELSS mutual funds, it shouldn’t be difficult for you to decide whether or not they are an excellent choice for you. These funds are generally recommended for individuals who want to save income tax and are aiming for long-term financial growth.Remember that as these funds have higher equity exposure, they are volatile and not recommended for someone wanting stable returns.