Equity Linked Savings Scheme (ELSS) by Mutual Funds

Tax planning is an important concern for a lot of people looking to save taxes under Section 80C. Section 80C of the Income Tax Act allows taxpayers to claim deductions from their taxable income by investing in certain instruments. Equity Linked Saving Schemes (ELSS) is one of the most popular investments allowed under Section 80C since the investors can avail of double benefits of capital appreciation and tax savings.

An ELSS is a diversified equity scheme with a lock-in period of three years from the date of the investment. If you invest in an ELSS through a systematic investment plan (SIP), each investment will be locked in for 3 years from their respective investment dates. There are both growth and dividend options for ELSS.

For tax purposes, returns from ELSS are tax free. Compared to other tax saving instruments under Section 80C like PPF and NSC, ELSS has a much lower lock-in period and has the potential of offering superior returns over the long term. However, ELSS is subject to market risks, like other mutual funds.

There are various tax saving avenues under section 80C of the Income Tax Act. Most of them are apt for risk-averse investors who are looking for investment in safe products. But for investors looking for equity exposure, the only two instruments available include ULIPs and ELSS. Here is a brief on ELSS.

Features

·         Investment is in equity, debt & money market instruments, or cash.

·         This product has a 3-year lock-in period. Post the 3 year time horizon, the product is like any other open-ended mutual fund for the investor. In case of early withdrawal, tax has to be paid by investors.

·         There is no upper limit on investment in an ELSS scheme. However, the upper limit under section 80C of the Income-tax Act is deductible from taxable income.

Advantages:

·         Eligible for Tax benefit: Investment in ELSS is deductible from taxable income thus reducing the taxable amount for the investor. In effect, the investor saves tax at a rate dependent on his income slab.

·         Tax free returns: Income/ returns on ELSS schemes (dividend and on redeCapital Gainsmption) is tax free under the EEE (Exempt- Exempt- Exempt) regime of the Income Tax Act.

·         Higher probability of better return: In order to avail of tax benefits, investors have to remain invested for at least 3 years. On an average, ELSS schemes have given good returns during the last five years. Of course, the returns are NOT guaranteed.

·         Lower lock-in period: In comparison to the various other investment avenues under section 80C of the Income-tax Act, ELSS has the shortest lock-in period.

Investment Options in ELSS

Investors in the ELSS product can opt for either the growth option or dividend option depending upon the need.

·         Growth Option: Under the growth option, investors will not get any income during the tenure of the investment ( i.e. Dividends). At the time of redemption, the investor will get a lump sum amount depending on the then prevailing NAV of the scheme.

·         Dividend Option: Under the Dividend option, the investor can opt for a dividend payout.

Dividend Payout: Under this plan, if the scheme declares a dividend, the investor will receive dividend income. Suppose if an investor has invested Rs. 20,000 at a NAV of Rs. 10 in an ELSS scheme, and a dividend is declared to the tune of 20%, she will get a dividend income of Rs. 4,000 which is not taxable and is not subject to any lock in though the original investment is subject to a lock-in of 3 years.

ELSS as an investment product offers twin benefits – capital appreciation and tax benefit. Assess your possible taxable income for the current year and find out the amount you need to invest in tax saving instruments. You need to start now as we are already at the end of this financial year.

If you have an appetite for equity investments and want to invest in ELSS schemes,  the best way is through a SIP (Systematic Investment Plan) rather than investing a lump sum amount in a hurry, because then you tend to time the market. Regular investment through a SIP will help to tide over the sharp market fluctuations and volatile movement in the prices of shares as a SIP will average the cost price of units over a period of time.

SIP provides you with the benefit of rupee cost averaging by buying a higher number of units when the market has fallen and vice versa. Invest wisely to amass wealth.

 

“Mutual Fund investments are subject to market risks, read all scheme-related documents carefully”