Debunking Common Myths About ELSS in Mutual Funds

ELSS funds are popular among investors as they offer dual benefits of tax-saving and exposure to equity markets. However, there are a few misconceptions about the ELSS fund investments that may lead to investors making uninformed decisions.

Here are some common myths about ELSS mutual fund investments in India.

Myth 1: ELSS Is Only a Tax-Saving Investment

Many investors think ELSS mutual funds are meant only for saving tax when, in reality, ELSS is an equity-oriented mutual fund that mainly invests in stocks and also offers tax benefits under Section 80C of the Income-tax Act, 1961, under the old tax regime.

Investors seeking long-term wealth creation can invest in ELSS funds and also enjoy tax benefits, according to applicable tax rules and conditions.

Myth 2: You Have to Withdraw ELSS After 3 Years

ELSS mutual funds do have a mandatory 3-year lock-in period, but they do not require investors to withdraw their investments after 3 years. When the lock-in period ends, investors can choose to stay invested or redeem their units based on their financial goals.

Myth 3: ELSS Investments Are Completely Tax-Free

While ELSS funds do offer tax benefits, they are not completely tax-free. Investors’ ELSS investments are eligible for tax deductions under the old tax regime, but Long-Term Capital Gains Tax (LTCG) is applicable to the profit earned at redemption or maturity.

Myth 4: ELSS Guarantees High Returns

ELSS funds pool money from many investors and invest it across different equity and equity-related assets. Hence, the returns are market-linked and not guaranteed. Even if an ELSS fund delivered good returns and performance in the past, it does not guarantee future returns.

Investors are advised to invest in an ELSS fund only if it aligns with their risk appetite and financial goals.

Myth 5: ELSS Is Suitable for Everyone

Like all investments, ELSS investments are not suitable for every investor, since they carry market-related risk due to their predominantly equity exposure. Investors must consider factors such as their financial goals, risk tolerance, investment horizon, and existing tax-saving investments before investing.

Myth 6: ELSS Gives Tax Benefits Under Both Tax Regimes

This is one of the most common myths people have regarding ELSS funds in India. ELSS fund investments are eligible for tax deductions only under the old tax regime and not the new one. Investors can claim the applicable Section 80C deduction for eligible ELSS investments only if they are taxed under the old tax regime and meet the relevant conditions.

FAQs

What is an ELSS mutual fund?

An Equity Linked Savings Scheme (ELSS) is a tax-saving equity mutual fund that invests predominantly in company stocks and has a mandatory three-year lock-in period.

What is the lock-in period for ELSS?

ELSS mutual funds have a mandatory lock-in period of 3 years.

Is ELSS completely tax-free?

No, ELSS investments are not completely tax-free. The initial investments are eligible for tax deductions, and the profits earned at redemption will attract long-term capital gains tax (LTCG).

Can I invest in ELSS through SIP?

Yes, you can invest in an ELSS mutual fund through a SIP.

Is ELSS eligible for tax benefits under the new tax regime?

No, investments in ELSS mutual funds are not eligible for tax deductions or benefits under the new tax regime