Elss (tax Savings) Mutual Funds

Investing is not only limited to growing wealth; it is also about making smart financial decisions that help you save taxes. There comes Equity Linked Savings Scheme (ELSS), one of the most popular tax saving investment options available to investors across the country. ELSS offers both wealth creation through equity investments and tax deductions under Section 80C of the Income Tax Act. For new investors trying to save on taxes and those experienced investors aiming to diversify their portfolios, ELSS Funds make a great addition to any financial plan.

What are ELSS Funds?

Equity Linked Savings Scheme (ELSS) funds are diversified equity mutual funds which make investment in equity and equity related instruments. The investments in these schemes are eligible for tax deduction under Section 80C, which allows investors to enjoy tax deductions of up to ₹1.5 lakh in a financial year. The investments in ELSS funds are locked for 3 years and investors cannot redeem or withdraw their investments during the 3 year period.

Features of ELSS Funds

• Equity Exposure: ELSS funds mainly make investments in equity and equity-related securities, providing opportunities to take advantage of growth in the stock market.
• Tax Benefits: Investments in ELSS funds comes with tax deductions of up to ₹1.5 lakh in a financial year under Section 80C of the Income Tax Act
• Shortest Lock-in Period: When compared to other tax saving instruments such as PPF and NSC, ELSS funds have a shortest lock-in period of 3 years.
• Professional Management: ELSS funds are managed by professionals, who keep an eye on investments to boost returns and control risk.
• Potential for Higher Returns: ELSS funds invest in equities, allowing investors to enjoy higher long-term gains than classic fixed-income tax savers.

How to Invest in ELSS Funds?

You can invest in ELSS funds by following simple process:

Step 1: Choose investment mode. You can invest through:

• AMC websites
• Online investment platforms provided by stockbrokers
• Mutual fund distributors

Step 2: Choose suitable ELSS fund

Step 3: Choose between Systematic Investment Plan (SIP) and Lump sum based on your goal and make investment.

Step 4: Make payment through UPI, netbanking or other available methods.

Why Invest in ELSS Funds?

• Tax Savings: With ELSS funds, you can reduce your taxable income and grow your money through market linked investments.
• Disciplined Investing: The lock-in period encourages to stay invested and take advantage of the power of compounding.
• Inflation Beating Returns: Unlike some other traditional tax-savers, ELSS Funds can give you higher returns over time outpacing the inflation.
• Flexibility via SIPs: You can start with small monthly deposits, which makes these funds accessible to almost everyone.
• Diversified Portfolio: These funds spread investments across different sectors and firms, cutting down concentration risk.

Taxation Rules for ELSS Funds

• Tax Deductions: Your investments in ELSS funds are eligible for tax dedication of up to 1.5 lakh in a financial year under Section 80C of the Income Tax Act, 1961. The deduction is allowed only, if you have chosen the old tax regime and not applicable to the new tax regime.
• Lock-in Period: ELSS funds have a mandatory 3-year lock-in starting from when you get your units. Even for SIPs, each month's investment has its own separate 3-year lock-in period.
• LTCG Exemption: Now, long term capital gains up to ₹1.25 lakhs in a fiscal year are tax-free. However, this exemption applies to all your equity mutual fund and listed share investments together.
• LTCG Tax Rate: Long-term capital gains over ₹1.25 lakh face a 12.5% tax rate (plus surcharge and cess), no indexation needed.