ELSS, also known as Equity-Linked Saving Schemes are tax saving mutual funds that invest a majority of their assets, at least 80% of their investment portfolio in equity and equity-related securities. These mutual funds have a lock-in tenure of three years. Investments in ELSS funds are eligible for a tax deduction of up to Rs 1.5 lac under section 80C of the Income Tax Act, 1961. As an investor you can save up to Rs 46,800 by investing in these tax saving mutual funds. Though there are quite a few tax-saving investment options under Section 80C that can help you save tax, none of these types of investments have the potential to generate significant returns like ELSS mutual funds. Following are three things you should know about ELSS mutual funds:
- You can make an SIP investment
Just like any other types of mutual funds, you can invest in ELSS either through a lumpsum investment or a Systematic Investment Plan (SIP). SIP investment divides the investment amount into smaller, insignificant parts which are invested in the desired mutual fund schemes regularly for a defined period. However, be mindful that each SIP instalment are mandated to complete the lock-in period. - Tax-free capital gains on returns below Rs 1 lac
Investment in ELSS funds provide more than just the tax deduction of Rs 1.5 lac. As these mutual funds have a lock-in period of 3 years, they attract long-term capital gains (LTCG) tax. LTCG tax up to Rs 1 lac are exempt from tax. - You can hold your mutual fund investments for more than three years
Although ELSS mutual funds are known to be the only tax-saving investments with the shortest lock-in tenure of three years, you can stay invested for a prolonged duration. Other Section 80C investments such as bank fixed deposits and Public Provident Fund (PPF) have a lock-in period of five and fifteen years respectively. On the other hand, ELSS funds provide the flexibility of redemption to their investors after mere three years. Having said that, it is advised that you stay invested for a longer duration, say ten years or more to make the most of your ELSS investment. Unless there is a fund manager issue or performance issue, hold on to your ELSS investments and link them to your long-term financial goals so that you do not get tempted to exit the scheme.
ELSS tax saving mutual funds are one of the most opportune, simplest, and lucrative tax-saving investments. With the convenience of SIP investments, you can now enjoy the benefits of not only generating wealth but also saving tax along the way. Before you invest in mutual funds, make sure that your risk profile, investment tenure, and financial objectives are aligned with your investment portfolio. Happy investing!