Indian investors love the idea of superior returns on their investments and not paying taxes on their income if given a choice. In most cases, you need to pick one of them. But there is one investment option that helps you have the best of both worlds. Equity-Linked Saving Scheme (ELSS) is a category of Mutual Funds that comes with tax benefits and stock market-linked returns.
By nature, these investments are for long or medium-term investors as there is a lock-in period of three years within which you cannot redeem your investments. Following are the reasons why you should invest in ELSS Funds:
Investment advisers unanimously agree that investing in stocks is the best option for creating wealth for someone investing for the long or medium term. There are various ways to invest in them, but lately, Mutual Funds have emerged as a popular tool for investors. ELSS Mutual Funds are also Equity oriented funds.
Fund managers of ELSS Funds are mandated to invest at least 65% of their corpus in stocks, but most support more than 95%. They can invest in companies of all sizes, whether large, mid, or small, across all sectors.
The most attractive feature distinguishing ELSS from other Equity Funds is its tax-saving feature. Under Section 80C of the Tax Reforms, the tax department allows investors to deduct investments up to Rs 1.5 lakh in specific investment tools, which results in tax-saving. ELSS is one of them. So, for example, if you fall under the highest income tax bracket of 30% and invest Rs 1.5 lakh in ELSS Mutual Funds, you save up to Rs 46,800 every year in tax outgo.
Though, one thing to remember is that ELSS returns may be taxable in some instances. Any long-term capital gains (LTCG) from stocks or Mutual Funds, including ELSS, above Rs 1 lakh, get taxed at 10%. This may sound disadvantageous compared to Public Provident Fund (PPF) and Unit-Linked Insurance Plans (ULIPs), for which returns are tax-free. But they have a higher lock-in and may be unsuitable for medium-term goals.
Income from National Saving Scheme (NSC) and Tax-Saving Fixed Deposit (FD) get taxed according to your income slab rate. So, if you fall under the highest tax slab of 30%, ELSS saves you more in taxes.
Among all tax-saving investment options allowed under Section 80C, ELSS Funds have the lowest lock-in period of three years, making it best suitable for those with medium-term investment goals. In comparison, the lock-in period for PPF is 15 years, for NSC is five to 10 years, and for Tax-Saving FD and ULIPs, it is five years.
The best feature of Mutual Funds is you can start investing at as low as Rs 500, making it ideal for all types of investors. Many ELSS Mutual Funds also accept investments as low as Rs 500; however, some may mandate a higher initial investment and allow a Systematic Investment Plan (SIP) of Rs 500 and above in the same fund.SIP facility lets you invest a fixed amount at defined intervals.
If you invest in ELSS Funds, the ideal case will be to use SIP mode rather than invest a lump sum amount. SIPs also reduce the risk of mistiming your investment by a large degree. However, ELSS entails one of the highest risks among tax-saving assets due to increased exposure to Equities. If you cannot withstand associated risks, look for other relatively safer options like PPF or NSC.
Disclaimer – ICICI Securities Ltd. ( I-Sec). The registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, AppasahebMarathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No: 022 – 6807 7100. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks. Read all scheme-related documents carefully. Please note, Mutual Fund associated services are not Exchange-traded products, and I-Sec is just acting as a distributor to solicit these products. All disputes to the distribution activity would not have access to the Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purposes.
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