ELSS Mutual Funds
Investors seek out investment possibilities that will enable them to build wealth, receive consistent returns, and/or reduce their tax burden. Although there are many investment plans on the market, the majority of them give returns that are taxed in accordance with income tax regulations. ELSS funds can help in this situation. Equity Mutual Funds that save on taxes are known as Equity Linked Savings Scheme or ELSS Funds. In this article, we'll examine ELSS Tax Saving Mutual Funds and discuss all you need to know about them.
What is ELSS Fund?
ELSS funds are Equity Funds that place a significant percentage of their capital in equity or products with an equity component. Since ELSS funds give a tax exemption of up to Rs. 150,000 from your yearly taxable income under Section 80C of the Income Tax Act, they are also known as tax saving plans.
An ELSS fund is an equity-oriented strategy with a three-year lock-in period, as the name would imply. Many individuals have used ELSS programmes recently to take advantage of tax benefits. You can receive tax exemption on your investment up to a maximum of Rs. 150,000 if you invest in ELSS plans. Additionally, your income from this plan will be taxed at 10% as a long-term capital gain (LTCG) at the conclusion of the three-year period (if the income is above Rs. 1 lakh).
Features of ELSS Mutual Funds
Some important features of ELSS funds are as follows:
- At least 80% of the total investible corpus is allocated to equities and products with an equity component.
- The fund makes diversified stock investments across a range of market capitalizations, themes, and industries.
- There is no maximum investment tenure. A three-year lock-in period does exist, though.
- Section 80C of the Income Tax Act exempts the invested amount from taxes.
- Income is regarded as LTCG and subject to general tax laws.
What are the tax benefits offered by ELSS Mutual Funds?
As was already indicated, the principal that you invest in an ELSS plan qualifies for a tax deduction under Section 80C of the Income Tax Act. Because it is a cumulative deduction advantage, investments made in any of the listed instruments, such as ELSS, NSC, PPF, etc., are eligible for a tax deduction of up to Rs. 1.5 lakh under the aforementioned clause.
These programmes also have a three-year lock-in term that is required. As a result, you obtain long-term capital gains (LTCG) when you redeem the units. Up to Rs. 1 lakh in one financial year, these gains are not taxed. Any LTCG beyond this threshold is subject to a 10% tax on profits over Rs. 1 lakh, exempt from indexation.
Why should you invest in ELSS Tax Saving Mutual Funds?
ELSS Tax Saving Funds offer a wide range of benefits including:
1. Diversification:- The majority of ELSS funds make investments in a varied range of businesses, from small-cap to large-cap, and in a variety of industries. This enables you to diversify the components of your investing portfolio.
2. Low minimum amount:- The majority of ELSS programmes allow investors to start with as little as Rs. 500. This makes sure that you may start investing right away without needing to build up a sizeable investible corpus.
3. SIPs:- Although you may invest a lump sum in an ELSS scheme, most investors prefer the SIP approach since it enables them to contribute small sums and takes advantage of tax advantages while also giving them the chance to build wealth.
You can invest as much as you wish, but Section 80C of the Income Tax Act limits the tax benefits you can receive. Additionally, you have the option to continue investing for as long as you choose following the required 3 year lock-in term.
Factors to consider before investing in ELSS Funds
Before investing in ELSS Funds in India, you should consider the scheme's performance over the last ten years in addition to the considerations listed below:
Investment + Tax Planning
Many investors only consider ELSS funds for tax planning since they are the only form of Mutual Fund that invests in the stock market and provides tax advantages. There are various solutions available under Section 80C of the Income Tax Act if reducing taxes is your only goal. Prior to investing in ELSS, you must make sure that you have a solid investment strategy in place to assist you in reaching your financial objectives. Tax preparation will obviously be a part of this approach. You can utilise ELSS funds to reach your long-term objectives.
SIP or Lump sum
Many investors quickly resort to ELSS funds in order to take advantage of tax benefits. As a result, they make a single, large investment in the market. This is the case because they are in a haste to save taxes and have no other option except to invest all at once. This may be dangerous, especially if you choose to invest while the market is strong. Starting a systematic investment plan (SIP) can help you average your buying cost per unit because ELSS investments are typically associated with long-term financial goals.
Recommended Investment Horizon
Due to its brief lock-in period of three years, ELSS funds are preferred by many young investors over PPF or NSC. Given that equity investments are known to stabilise over a period of 5-7 years, this approach may be ineffective. Short-term investment horizons with ELSS funds should be avoided due to their inherent volatility.
Conclusion
The best investing alternatives, with greater returns and a short lock-in period, are ELSS mutual funds. The tax savings provided by the plan are its strongest feature.
ELSS is a crucial piece of equipment for any portfolio. You may register a demat account in India to make investing and maintaining your financial portfolio easier. One of the advantages of demat accounts is the ability to view your entire portfolio at once. Therefore, start your long and successful investing journey by opening a Demat account.
Also read:-
Tags
Mutual Funds