What and Why ELSS?

Investors always look for avenues to help them get returns, save taxes and generate wealth. While numerous investment schemes are available in the market, the returns generated are taxed according to Income Tax rules. ELSS or Equity Linked Savings Schemes are tax-saving equity mutual funds. It is an open-ended equity mutual fund that invests primarily in equities and equity-related products.

Let’s explore more about ELSS Funds and its important aspects.

  • What is ELSS Fund?

    ELSS funds are funds that invest your money into equity or equity-related instruments. They are also called tax saving schemes as they offer tax deduction of up to Rs. 150,000 from your taxable income as per Section 80C of the Income Tax Act.

  • It is an equity-oriented scheme with a mandatory lock-in period of three years. When you invest in ELSS schemes, you can avail tax deduction of the invested amount limited to Rs. 150,000. Any income you earn under this scheme will be considered and taxed as Long Term Capital Gains. (LTCG)

  • Features of ELSS Mutual Funds

    Some of the important features of ELSS funds are as follows:

  • A minimum of 80% of the total investment corpus is to be invested in equity-related instruments.

  • The fund can invest in equity across different sectors, market capitalisations, & themes.

  • There is no maximum limit to the tenure of investment. However, there is a minimum lock-in period of 3 years.

  • Tax deduction on the invested amount will be as per Section 80C of the Income Tax Act, 1961.

  • Income will be treated as LTCG and taxed according to the applicable tax rules.

  • Why should one invest in ELSS Tax Saving Mutual Funds?

    ELSS Tax Saving Funds offer several benefits, including:

  • SIPs

    While you can also invest a lump sum amount in ELSS, most investors prefer the SIP route as it allows investments in small amounts and an opportunity to generate wealth.

  • Minimum Amount

    Most ELSS funds allow investing with an amount as low as Rs.500. This enables you to start investing without accumulating an investible corpus.

  • Diversification

    ELSS funds invest across various groups of companies ranging in all market capitalisations. This allows you to diversify your investment portfolio and risk.

  • Wealth Creation with ELSS
    Saving Tax with ELSS
    Shutter Lock Period in ELSS

      Factors to consider before investing in ELSS Funds

      Before you invest in ELSS, you should look at the scheme’s overall performance over the past decade. Additionally, you should also consider the factors mentioned below before investing-

    • Investment & Tax Planning

      Many investors look at ELSS only for the purpose of tax planning. However, If your only aim is to save tax, other alternatives are available under section 80C. You should first create an investment plan as per your financial goals before investing in ELSS. Then, it will naturally include tax planning. These funds can also be used to achieve your long-term goals.

    • Lumpsum or SIP

      To avail of tax benefits, many investors tend to invest in ELSS funds through the lumpsum route. It is suitable when there is limited time to save taxes, and lump sum investment remains the only choice. However, market fluctuations can affect your invested corpus. Investing through a systematic investment plan (SIP) may help you minimise risk as it can average out the buying cost of every unit.

    • Investment Horizon

      Many investors prefer ELSS due to the short lock-in period. This can become counterproductive since equity investments are volatile and best suited for the long term. This is why one may keep a long-term investment horizon when investing in ELSS.

      Final Words

      By investing in ELSS, you can save tax and simultaneously aim to create wealth. Section 80C of the Income Tax Act 1961 allows taxpayers to reduce their income tax liability by investing in specified investments like PPF, NPS & ELSS. The invested amount can be claimed as a deduction from the total taxable income when filing the returns. It is important to note that these investments should not be made only for tax-saving purposes. It should be linked to your financial goals as well.

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Disclaimer: The views expressed herein are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information / data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risk and uncertainties that could cause actual results, performance, or event to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in the future. LIC Mutual Fund Asset Management Ltd. / LIC Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investment made in the scheme(s). Neither LIC Mutual Fund Asset Management Ltd. and LIC Mutual Fund (the fund) nor any person connected with them, accepts any liability arising from the use of this document. The recipients before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.


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