Equity Linked Savings Scheme: Know how to save tax while getting better returns

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February 06, 2020 4:19 PM

Note that, only amounts up to Rs 1.5 lakh are eligible for a tax break, however, there is no maximum investment limit to your investment in the ELSS. This limit also includes other investments and deductions.

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Equity Linked Savings Scheme (ELSS) is a diversified equity mutual fund, which is mostly looked at by investors to save tax while making an investment in this fund. With ELSS, a minimum of 65 per cent of the fund’s assets is invested in the stock market. Unlike other fund options such as financial services, infrastructure or sector funds, investments under this scheme are diversified and invested across sectors and industries.

Hence, if you have been contemplating tax-saving mutual funds, here are some things to be aware of.

ELSS and tax benefit

The fund manager of an ELSS fund will decide which market cap to invest in. The fund will incline towards large-cap or a mid-cap
depending on whether the fund manager focuses on large stocks or smaller fare.

Equity Linked Savings Scheme provides a tax benefit under Section 80C of the Income Tax Act. Designated investments are eligible for a tax deduction, under this section. For instance, if your total income is Rs 10 lakhs, and you invest Rs 1.50 lakh under Section 80C, the total taxable income of your drops to Rs 8.5 lakhs.

Note that, only amounts up to Rs 1.5 lakh are eligible for a tax break, however, there is no maximum investment limit to your investment in the ELSS. This limit also includes other investments and deductions.

ELSS and its lock-in period

The ELSS is an open-ended fund, wherein you can buy and sell units anytime. To avail of the tax benefit, it has a minimum lock-in period of 3 years. Hence, an investor cannot sell his/her units before the completion of this period.

If you start a SIP for an ELSS fund, it will be mature 3 years from the date of investment. For instance, if you start your SIP on Jan 1, 2020, the lock-in period will be 3 years starting from January, and for the installment made on October 1, 2020, the lock-in period will start for 3 years from October 2020. Fundamentally, every installment has a 3-year lock-in starting from the date of that specific installment was made. After the lock-in period, however, investors can access the money any time, given it is an open-ended fund.

Usually seen, all tax-saving investments have a lock-in period, starting with 5 years for National Savings Certificate (NSC), the 5-year fixed deposits (banks and the post office), and 15 years of Public Provident Fund (PPF).

ELSS and its returns

On redeeming the units of this fund, the long-term capital gains (LTCG) comes into play, as these funds have to be held for at least 3 years. In the Union Budget of 2018, LTCG tax on equity was reintroduced, before which for a number of years, tax on LTCG on equity was nil. Investors now pay 10 per cent tax on gains exceeding Rs 1 lakh, made from the sale of equity or equity-oriented mutual funds.

Also as it is a market-linked product, the returns are not guaranteed or assured. Similar to any equity investment, exit when the market is better positioned.

Hence, once the 3-year lock-in period is completed, it does not mean you have to sell your units. Try to keep a longer-term perspective in mind, with every equity investment.

If you have a low allocation to equity, combined with the tax break under Section 80C, ELSS makes for an excellent investment option. Experts suggest ELSS has the potential for wealth creation and also likely to beat inflation. However, keep in mind to choose your fund wisely as there are various options available in the market and not all are good.

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