What are ELSS Funds? How to invest in them and the tax benefits

ELSS fund lock-in period

What are ELSS funds? ELSS, short for Equity Linked Savings Schemes, are mutual fund plans that primarily invest in the equity market. The 3-year lock-in period of ELSS is an advantage over other tax-saving options as it restricts selling of the investment until three years from the date of acquisition. However, holding on to the asset for as long as possible is recommended to maximize the returns from ELSS funds.

The following are some of the popular ELSS Funds:

  • Axis Long Term Equity Fund-Reg(G)
  • Axis Long Term Equity Fund-Reg(IDCW)
  • Mirae Asset Tax Saver Fund-Reg(G)
  • Canara Rob Equity Tax Saver Fund-Reg(IDCW)
  • Kotak Tax Saver Fund(IDCW)

How do ELSS mutual funds work?

ELSS (Equity-Linked Savings Scheme) is a type of mutual fund that invests primarily in equity-related securities. The fund pools money from multiple investors to create a more significant investment pool managed by a professional fund manager. ELSS funds are considered relatively high-risk investment options compared to other tax-saving options, but they also have the potential to provide higher returns over the long term.

  • Lock-in Period: ELSS funds have a lock-in period of three years, meaning investors cannot redeem their units for three years from the date of investment.
  • Investment Process: Individuals can choose to invest directly with a mutual fund house or through a distributor to invest in ELSS funds. They can make a lump sum investment or opt for a systematic investment plan (SIP), where they support a fixed amount of money at regular intervals.
  • Risk and Returns: ELSS funds are subject to market risk, and past performance does not indicate future returns. They have the potential to provide higher returns but also come with higher risk compared to other tax-saving options.

These funds are a tax-saving investment option that invests in a diversified portfolio of equity-related securities. They offer tax benefits, a lock-in period, and the potential for higher returns, but they also come with higher risk compared to other tax-saving options. Individuals should consider their investment goals, risk tolerance, and financial situation before investing in ELSS funds and consult a financial advisor for guidance.

What are the features of ELSS funds?

  • Equity and equity-related securities account for at least 80% of the entire investible corpus.
  • The fund makes diversified stock investments across various market capitalizations, themes, and industries.
  • There is no maximum investment tenure. A three-year lock-in period does exist, though.
  • Section 80C of the Income Tax Act exempts the invested amount from taxes.
  • Income is taxed per the current tax laws and regarded as LTCG.

What are the tax benefits offered by ELSS funds?

  • Low minimum investment and no cap: If you choose an SIP, you can begin investing in this fund with as little as Rs. 500. Although there is no maximum investment amount, you can claim tax exemption for up to ₹1.5 lakhs a year.
  • Very brief lock-in period: ELSS funds’ lock-in period is shorter than other Section 80C tax-saving investments. ELSS only has a 3-year lock-in time, compared to PPF investments with a 15-year lock-in period and FDs with a 5-year lock-in period to claim tax advantages.
  • Two-tier tax benefit: ELSS is a powerful tax-saving tool. It is an excellent option for investors pursuing long-term capital building while avoiding tax burden.

Things to consider before investing in ELSS funds

Fund returns

You should be aware that ELSS funds’ performance is a function of their underlying stocks’ performance. Hence, they cannot guarantee returns. However, compared to other tax-saving investing options, having an investment horizon longer than five years can offer better returns.

History of the fund house

Choose a fund house with a consistent track record of five to 10 years. You must have a longer investment horizon due to ELSS funds’ equity exposure to lessen market volatility.

Expense ratio

The fund charges an annual fee to cover its operating expenses, which is its expense ratio. It is expressed as a percentage of the fund’s assets. Investors should consider the expense ratio of ELSS funds before investing, as higher expense ratios can reduce overall returns.

Financial parameters

Financial parameters include the fund’s past performance, asset allocation, and the market conditions in which it operates. Investors should consider the economic parameters of these funds to understand the fund’s level of risk and potential for returns.

Fund manager

The fund manager is responsible for making investment decisions for the fund. Investors must consider the experience and track record of the fund manager, as this can impact the fund’s performance.

Who should invest in ELSS mutual funds?

Salaried individuals

ELSS mutual funds offer an excellent option for salaried individuals looking for long-term investment options to meet their financial goals. ELSS funds allow salaried individuals to grow their wealth and reduce their tax liability. Besides, as ELSS funds have a lock-in period of three years, salaried individuals can benefit from long-term compounding and potentially high returns.

First-time investors

ELSS mutual funds suit first-time investors looking to invest in the stock market. These funds provide an opportunity to invest in a diversified portfolio of equity stocks, providing the benefits of stock market investment with a lower risk profile than investing directly in individual stocks. Additionally, the long-term investment horizon of these equity-linked funds makes them an ideal investment option for first-time investors.

Conclusion

ELSS, as we have discussed, is an equity-linked savings scheme provided by mutual funds in India. They offer tax advantages under Section 80C of the 1961 Income Tax Act. You can choose SIP or the lump sum investment options to enroll for these funds. The lock-in period is three years, making it more liquid than the NSC and Public Provident Fund choices.

FAQs

How to invest in ELSS to save tax?

To invest in ELSS to save tax, individuals can choose to invest in ELSS mutual funds through various modes such as lump-sum or SIP. Select a suitable fund based on financial parameters and fund manager performance, and hold the investment for at least three years to benefit from tax savings under Section 80C of the Income Tax Act.

How much can you invest in ELSS to save tax?

An individual can invest up to ₹1.5 lakhs in these funds to save tax under Section 80C of the Income Tax Act.

Is ELSS taxable after three years?

ELSS returns are taxable after the 3-year lock-in period. Capital gains are taxed as long-term (held over a year) at 10% without indexation or 20% with indexation and short-term (held less than a year) at the individual’s tax slab rate.

What are the disadvantages of ELSS?

ELSS are mutual funds with a lock-in period of three years and are tax-saving investment options. Some disadvantages of these funds include limited liquidity during the lock-in period, potential loss of capital if the stock market performs poorly, and higher volatility compared to other tax-saving options.

Which is better ELSS or mutual fund?

ELSS (Equity Linked Savings Scheme) is a type of mutual fund with tax benefits and a lock-in period, making it suitable for tax-saving goals. Regular mutual funds offer more flexibility for various investment objectives.

What is an example of ELSS?

Axis Long Term Equity Fund is a notable example of ELSS, known for its potential to deliver tax benefits and long-term capital appreciation.

Is ELSS tax free after 3 years?

Yes, ELSS (Equity Linked Savings Scheme) becomes tax-free after the mandatory lock-in period of three years, allowing investors to enjoy long-term capital gains without additional tax implications.

Disclaimer: Investing in mutual funds is subject to market risks. Please read all scheme-related documents carefully before investing. Potential returns from a mutual fund product are not guaranteed. Past performance is not indicative of future results. None of our articles are intended to and should be considered investment/financial advice from CoinSwitch.

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