WHAT ARE ELSS FUNDS AND HOW DO THEY WORK?

Posted on by Ownership

Related Post

Investors are always on the lookout for right investment option that can help them achieve their financial goals in the desired duration. There are several types of mutual funds offered to investors to serve the varying needs of different investors. One such type of mutual fund is ELSS mutual funds. In this article, we will cover what ELSS funds are and how do they work.

What are ELSS funds?

ELSS or Equity-Linked Savings Scheme are tax saving mutual funds that are mandated by SEBI (Securities and Exchange Board of India) to invest at least 80% of their portfolio in equity asset classes. These mutual funds offer a tax deduction of up to Rs 1.5 lac under section 80C of the Income Tax Act, 1961. This means that you can save up to Rs 46,800 every year simply by investing in tax-saving investments such as ELSS funds*. Hence, ELSS funds are believed to offer dual benefits of tax saving benefits and wealth appreciation. Just like other tax-saving investments, ELSS funds are also accompanied by a lock-in period of three years. However, it should be noted that these tax saver mutual funds enjoy the lowest lock-in period. Other tax-saving investments such as Unit-Linked Insurance Plan (ULIP), National Savings Certificate (NSC), tax-saving fixed deposits (FD), Public Provident Fund (PPF) have a lock-in tenure of 5 years, 5 years, 5 years, and 15 years respectively.

Feature of ELSS mutual funds

Following are some of the features of ELSS tax saving mutual funds that you as an investor must be aware of:

  1. ELSS funds allot at least 80% of their assets to a portfolio of diversified equity and equity-related securities
  2. ELSS mutual funds have a lock-in period of 3 years
  3. ELSS funds allow tax deduction of up to Rs 1.5 lac u/s 80C
  4. Gains from ELSS investments are subject to LTCG (long-term capital gains). LTCG of up to Rs 1 lac per annum are exempt from paying any tax. Any gains above Rs 1 lac are taxed at 10%.
  5. As ELSS funds majorly invest in equities, they have a high potential to earn inflation-beating returns.

How do ELSS funds work?

Just like any other type of mutual funds, you can invest in ELSS funds either through the systematic and disciplined approach of SIP (systematic investment plan) or in one-go through lumpsum investment. This means that you can invest as low as Rs 100 per month in ELSS funds. Note that, though there’s no upper limit to invest in ELSS funds, ELSS funds offer a tax deduction of just Rs 1.5 lac per annum. For instance, if you invest Rs 2 lacs in ELSS funds, you’ll be eligible for a tax deduction of just Rs 1.5 lacs through ELSS funds (provided that you haven’t invested in any other tax-saving investments).

Even though ELSS funds have a lock-in period of just 3 years, experts suggest investors to stay invested for a longer period. In fact, you can link your long-term investment goals to ELSS investments so that you do not get tempted to exit the markets. Happy investing!

To earn a tax deduction of Rs 46,800, it is important that the investor belongs to the highest tax slab*