Why ELSS is best investment Option

The USPs of investing in mutual funds is the fact that there are schemes to cater every type of investor. No matter if you are aiming for long-term wealth investment or stable income from the investment, there are different types of mutual fund schemes to match your investment goals. Now there are some schemes to help you save taxes Popularly known as tax-saving funds or Equity Linked Savings Schemes (ELSS).

Equity Linked Savings Schemes (ELSS) are eligible for income tax deduction under Section 80C of the income tax -IT Act. Let us have a detailed look at what is ELSS funds and their tax benefits.

What is ELSS?

Equity Linked Savings Scheme is a type of diversified mutual fund. While these  schemes have  exposure in equity and equity-related instruments mostly , and some  part of the investment is made in the debt .

Just like other types of mutual funds, an investor can either invest a lump sum amount in an ELSS fund of their choice or start a SIP. These funds have a lock-in period of 3-years, and an investor must remain invested throughout this period to claim the tax deduction.

Tax Saving with ELSS

As mentioned above, ELSS funds are eligible for a tax deduction as per the IT Act, Section 80C. A maximum deduction of up to Rs. 1,50,000 is allowed in a financial year by investing in these funds. With the majority of the investment in equity, ELSS funds are known to offer the dual benefits of long-term wealth creation and tax benefits.

But note that the tax benefits will be reversed if an investor withdraws the ELSS investment before the mandatory lock-in period of 3-years.

Tax Saving with ELSS SIP

A lot of ELSS investors often get confused about how to claim a tax deduction if they have started a SIP in an ELSS fund. But no matter if you invest a lump sum amount or start a SIP in ELSS, the maximum deduction will be Rs. 1,50,000 in a financial year.

It is up to you whether you want to invest Rs. 1.5 lakhs at once or invest Rs. 12,500/month for 12 months. You are eligible for a tax deduction in both cases as per Section 80 of the IT Act. But do note that the lock-in period of every SIP will be 3-years from when you invest the amount.

Taxation of Capital Gains from ELSS

As ELSS mutual funds are equity-oriented funds, they are taxed as any other equity fund. LTCG of 10% without the indexation benefit is applicable when you redeem your ELSS investment after the lock-in period of 3-years and your gains for the year are above Rs. 1 lakh.

But as ELSS funds have excellent long-term wealth creation potential, most investors generally do not redeem their investment even after the lock-in period. A tax-saving mutual fund scheme like ELSS has the shortest lock-in period of just three years. This makes ELSS one of the best ways to save taxes as well as create wealth over the long term.

Benefits of Investing in ELSS

Tax deduction under section 80C of up to Rs. 1,50,000 per year

Lower lock-in period and higher return potential in comparison to other 80C investment options such as Tax-saving FD, PPF, NPS, and NSC.

Freedom to invest a lump sum amount or start SIP with as little as Rs. 1,000/month

Dividend option if you want to earn a regular income from your ELSS investment

Professional fund managers make investment decisions on behalf of the investors

Why You Should  Invest in ELSS?

Now that you know what is ELSS mutual funds, it shouldn’t be difficult for you to decide whether or not they are an excellent choice for you. These funds are generally recommended for individuals who want to save income tax and are aiming for long-term financial growth.

Must Remember that as these funds have higher equity exposure, they are volatile and not recommended for someone wanting stable returns.


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