Equity Linked Savings Schemes: A Smart Investment Guide

Equity Linked Savings Schemes (ELSS) are tax-saving mutual funds that invest a large portion of their corpus into equities and equity-related instruments. ELSS funds are the only kind of mutual funds eligible for tax deductions under Section 80C of the Income Tax Act, 1961. They offer tax deductions of up to Rs 1,50,000 per year and have a lock-in period of three years, the shortest among all tax-saving investments. ELSS funds provide the dual benefit of tax deductions and wealth accumulation over time, with returns of 10-12% in the long run.

ELSS funds are tax-saving equity mutual funds

ELSS or Equity Linked Savings Scheme funds are tax-saving mutual funds, in which the majority of the funds are invested in equity schemes. The investments in ELSS receive tax benefits under section 80C of the Income Tax Act, 1961. ELSS funds are also called tax-saving schemes since they offer tax exemption of up to Rs. 150,000 from your annual taxable income under Section 80C of the Income Tax Act.

ELSS funds are equity funds that invest a major portion of their corpus into equity or equity-related instruments. As the name suggests, an ELSS fund is an equity-oriented scheme with a mandatory lock-in period of three years. ELSS funds are also called tax-saving schemes as they offer tax exemptions. If you invest in ELSS schemes, you can avail tax exemption of the invested amount up to a limit of Rs. 150,000.

The income that you earn under this scheme at the end of the three-year tenure will be considered a Long-Term Capital Gain (LTCG) and will be taxed at 10% (if the income is above Rs. 1 lakh). ELSS funds are equity funds with a diverse portfolio. These funds primarily invest in publicly traded firms' stocks. The stocks are drawn from a variety of market capitalisations (large, mid, and small companies) and industries. These funds seek to optimise long-term wealth appreciation.

The fund management selects stocks after doing extensive market research to achieve the best risk-adjusted portfolio returns. Investments in an ELSS fund are tax-deductible under Section 80C of the Income Tax Act of 1961. While there is no upper limit on the amount that can be invested, the IT Act allows for a tax deduction of up to Rs. 1.5 lakh. Investing this amount in an ELSS can result in tax savings of up to Rs. 46,800 per year.

ELSS Tax Saving Funds offer a wide range of benefits, including diversification, low minimum amounts, and SIPs. Most ELSS funds invest across a diverse group of companies, ranging from small-cap to large-cap and across various sectors. This allows you to add the element of diversification to your investment portfolio. Most ELSS schemes allow investors to start investing with as low as Rs. 500. This ensures that you can start investing without having to accumulate a reasonable investible corpus.

While you can invest a lump sum amount in an ELSS scheme, most investors prefer the SIP method as it allows them to invest in small amounts and avail tax benefits along with an opportunity to create wealth. Additionally, you can invest as much as you want but can avail tax benefits as limited by Section 80C of the Income Tax Act. Also, you can choose to stay invested after the stipulated lock-in period of three years for as long as you want.

ELSS funds have a lock-in period of three years

The purpose of the lock-in period is to encourage long-term investing, discourage impulsive decisions, and ensure that investors remain committed to their investments. This also allows fund managers to manage the fund's assets more efficiently, knowing that investors are locked in for a specific period.

After the lock-in period ends, investors can choose to redeem their units whenever they want. ELSS funds then become open-ended equity-oriented investment schemes with full liquidity.

ELSS funds are the only tax-saving investment with the potential to offer inflation-beating returns

ELSS or Equity Linked Savings Scheme funds are tax-saving mutual funds that invest a large portion of their corpus in equity or equity-related instruments. They are covered under Section 80C of the Income Tax Act, 1961, which allows for tax deductions of up to Rs. 1,50,000 per year, resulting in tax savings of up to Rs. 46,800. ELSS funds have a mandatory lock-in period of three years, the shortest among all tax-saving investments, and they offer the potential for high returns.

Dual Benefits of Tax Deductions and Wealth Accumulation

ELSS funds offer not just tax deductions but also wealth accumulation over time. This dual benefit makes them attractive to investors seeking to maximise their returns while minimising their tax liability.

Inflation-Beating Returns

ELSS funds are the only tax-saving investment option with the potential to offer returns that can beat inflation. This is because they primarily invest in equities, which have a strong potential for good returns.

Lock-in Period

The three-year lock-in period of ELSS funds is the shortest among all Section 80C investments. This makes ELSS funds more liquid compared to other tax-saving instruments, such as fixed deposits, which typically have a five-year lock-in period.

Diversification and Risk Mitigation

ELSS funds invest across diverse sectors, themes, and market capitalisations, ranging from small-cap to large-cap companies. This diversification helps to spread risk and potentially enhance returns.

Ideal for Salaried Individuals and First-time Investors

ELSS funds are well-suited for salaried individuals who want to generate higher returns on their investment portfolios. They are also a good choice for first-time investors as they provide a combination of tax benefits and exposure to equity investing and mutual funds.

SIP and Lump Sum Investment Options

Investors can choose to invest in ELSS funds through Systematic Investment Plans (SIPs), which allow for small, regular investments, or lump sum investments. SIPs are generally considered a better option as they provide the benefit of rupee cost averaging and help mitigate the risk of investing a large sum at an inopportune time.

Tax Implications

ELSS funds are taxed like any other equity fund. Dividends are added to the investor's income and taxed according to their income tax slab. Long-term capital gains (LTCG) up to Rs. 1 lakh per year are tax-exempt, while gains exceeding this amount are taxed at a rate of 10%.

In conclusion, ELSS funds offer a unique combination of tax savings, wealth accumulation, and inflation-beating returns, making them a powerful tool for investors seeking to maximise their returns while minimising their tax liability.

ELSS funds offer tax deductions of up to Rs 1,50,000 a year

ELSS funds are the only kind of mutual funds eligible for tax deductions under Section 80C. They are also the only tax-saving investment with the potential to offer inflation-beating returns.

ELSS funds have a lock-in period of three years, the shortest among all tax-saving investments, and there is no upper limit on the amount that can be invested. However, only investments up to Rs 1.5 lakh qualify for the tax deduction.

ELSS funds are suitable for salaried individuals who want to generate higher returns on their investment portfolios, as well as first-time investors who want to get a flavour of equity investing and mutual funds.

When deciding whether to invest in ELSS funds, it is important to consider the investment horizon, returns, and lock-in period. ELSS funds do not provide guaranteed returns and are subject to market risk. However, with an investment horizon of more than five years, ELSS funds can provide higher returns than any other tax-saving investment option.

Investors can choose between investing via a Systematic Investment Plan (SIP) or lump sum. SIP is generally considered the best option as it gives investors the advantage of cost averaging and is less risky. However, if investors have a high-risk tolerance and a long investment horizon, investing a lump sum may be a better option during bearish market trends.

ELSS funds are suitable for salaried individuals and first-time investors

For first-time investors, ELSS funds provide an introduction to equity investing and mutual funds. While equity investments carry a higher risk, this is generally over the short term due to market volatility. ELSS funds, with their three-year lock-in period, are designed for long-term investment, and the risk is much lower if invested for more than five years. Additionally, ELSS funds offer tax benefits, making them a more appealing option for new investors.

ELSS funds are also suitable for salaried individuals and first-time investors because of their low minimum investment requirements. Most ELSS schemes allow investors to start with as little as Rs.500, making them accessible to those who may not have a large amount of capital to invest. The SIP (Systematic Investment Plan) method is a popular choice, as it allows investors to invest small amounts regularly and avail of tax benefits while creating wealth over time.

Furthermore, ELSS funds offer diversification, as they invest across a wide range of companies, from small-cap to large-cap, and various sectors. This helps to mitigate risk and provides a well-rounded investment portfolio. The performance of ELSS funds depends on the underlying equities in the portfolio, and they have the potential to offer higher returns compared to other tax-saving options like fixed deposits or PPF.

Overall, ELSS funds are a good option for salaried individuals seeking higher returns and tax benefits, as well as first-time investors looking for a combination of tax advantages and long-term investment security.

Frequently asked questions