This tax season if you are looking for a tax saving instrument that will also help you generate some decent capital appreciation, you can consider investing in ELSS. Equity Linked Savings Scheme (ELSS) is an open ended mutual fund scheme that comes with a three year statutory lock-in and a tax benefit. Earlier, the Indian investor only had conservative schemes to choose from. The problem with these investments is that they come with lengthy lock-in periods, offer very low interest rates and have zero flexibility. The introduction of ELSS has made investing for tax saving easier for the Indian investor.
What is ELSS? How does ELSS help investors save tax?
Equity Linked Savings Scheme is probably the only mutual fund scheme under Section 80C of the Indian Income Tax Act, 1961 that allows tax deduction on investment. Here’s an example to help you understand how ELSS works:
TanishqaChatterjee is a data scientist who earns Rs. 15 lakhs per year. This lands Tanishqain the highest tax bracket. Tanishqalearns about ELSS from a close relative and decides to invest Rs. 1.5 lakh. According to 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1,50,000 in ELSS and claim tax deductions for the same. By investing in ELSS Tanishqa’s gross taxable income has now come down to Rs. 12 lakhs per annum. Also, the three year lock in will ensure that the invested amount continues to accrue interest and might even help her building wealth in the long term.
What makes ELSS a favorite among Indian tax payers?
There are several reasons why Indian tax payers are shifting from conservative investment avenues to ELSS fund. Firstly, ELSS comes with a three year lock-in period. This is probably the shortest lock-in period as compared to traditional tax saving instruments like PPF, NPS or FDs which come with a lock-in period ranging from 5 years to 15 years (sometimes even more). ELSS also offers investors to make a lump sum investment or start a monthly SIP. If you want to invest small amounts at regular intervals and build a decent corpus over the long term, then you can consider starting a SIP in ELSS fund. With SIP only the invested amount is exposed to market’s volatile nature and not the entire investment amount. All an investor has to do is decide on the monthly investment amount and complete all the one time formalities with their bank and KYC documentation with the fund house following which, every month on a fixed date a predetermined amount will be debited from the investor’s savings account and electronically transferred to the fund.Investors can start investing in ELSS with a monthly SIP amount as low as Rs. 500.
ELSS scheme comes in growth and dividend option. If you seek regular income from your ELSS fund, then you can opt for the dividend option. The dividend is distributed to investors whenever ELSS scheme earns capital appreciation. This dividend is taken from the fund’s NAV and distributed to investors. However, there is no guarantee that investors will receive dividends at regular intervals. On the other hand, if you seek long term capital appreciation from your ELSS investments then you can go with the growth option. In growth option, the interest earned by the ELSS fund is invested back in the scheme. Over the long term, these reinvestments might not only cause an increase in the fund’s NAV but also help your money compound and help you build a large corpus in the long run.
ELSS is an equity oriented scheme which does not guarantee capital appreciation. Hence, investors are expected to talk to their financial advisor before investing.