Investors look for investment opportunities that can help them generate wealth, get regular returns, and/or save taxes. While there are numerous investment schemes available in the market, most of them offer returns that are taxed according to the Income Tax rules. This is where ELSS funds step in. Equity Linked Savings Schemes or ELSS mutual Funds are tax-saving equity mutual funds.
List of ELSS Mutual Funds
- Quant Tax Plan Direct Growth
- SBI Long Term Equity Fund Direct Plan Growth
- Mirae Asset Tax Saver Fund Direct Growth
- Parag Parikh Tax Saver Fund Direct Growth
- Groww ELSS Tax Saver Fund Direct Growth
- Axis Long Term Equity Direct Plan Growth
- Kotak ELSS Tax Saver Fund Direct Growth
- Tata ELSS Tax Saver Fund Direct Growth
- Canara Robeco ELSS Tax Saver Direct Growth
- DSP Tax Saver Direct Plan Growth
What are ELSS Funds
ELSS funds are equity funds that invest a major portion of their corpus into equity or equity-related instruments. ELSS funds are also called tax saving schemes since they offer tax exemption of up to Rs. 150,000 from your annual taxable income under Section 80C of the Income Tax Act.
As the name suggests, an ELSS fund is an equity-oriented scheme with a mandatory lock-in period of three years. In recent years, many taxpayers have turned to ELSS schemes to avail of tax benefits. If you invest in ELSS schemes, then you can avail tax exemption of the invested amount up to a limit of Rs. 150,000. Further, the income that you earn under this scheme at the end of the three-year tenure will be considered as Long Term Capital Gain (LTCG) and will be taxed at 10% (if the income is above Rs. 1 lakh).
Features of ELSS Mutual Funds
Some important features of ELSS funds are as follows:
- A minimum of 80% of the total investible corpus is invested in equity and equity-related instruments
- The fund invests in equity in a diversified manner – across different market capitalizations, themes, and sectors.
- There is no maximum tenure of investment. However, there is a lock-in period of three years.
- Tax exemption on the invested amount under Section 80C of the Income Tax Act.
- Income is treated as LTCG and taxed according to the prevalent tax rules.
How Does ELSS Funds Work?
ELSS funds are equity funds with a diverse portfolio. These funds primarily invest in publicly traded firms' stocks. The stocks are drawn from a variety of market capitalizations (large, mid, and small companies) and industries. These funds seek to optimize long-term wealth appreciation. The fund management selects stocks after doing extensive market research to achieve the best risk-adjusted portfolio returns.
Investments in an ELSS fund are tax deductible under Section 80C of the Income Tax Act of 1961. While there is no upper limit on the amount that can be invested, the IT Act allows for a tax deduction of up to Rs. 1.5 lakh. Investing this amount in an ELSS can result in tax savings of up to 46,800 per year.
How Should You Invest in an ELSS Fund?
There are many ways you can invest in ELSS funds, and they are:
- Invest Through Online Mutual Fund Investment Platforms like Groww.
- Invest through an existing demat account.
- Through registrars.
- Through an agent.
Why should you invest in ELSS Tax Saving Mutual Funds?
ELSS Tax Saving Funds offer a wide range of benefits including:
- Diversification – Most ELSS funds invest across a diverse group of companies ranging from small-cap to large-cap and across various sectors. This allows you to add the element of diversification to your investment portfolio.
- Low minimum amount – Most ELSS schemes allow investors to start investing with as low as Rs.500. This ensures that you start investing without having to accumulate a reasonable investible corpus.
- SIPs – While you can invest a lump sum amount in an ELSS scheme, most investors prefer the SIP method as it allows them to invest in small amounts and avail tax benefits along with an opportunity to create wealth.
Additionally, you can invest as much as you want but can avail tax benefits as limited by Section 80C of the Income Tax Act. Also, you can choose to stay invested after the stipulated lock-in period of 3 years for as long as you want.
Taxation Rules of ELSS Funds
Since ELSS funds are locked up for three years, there is no way to realize short-term profit gains. As a result, you can only realize long-term capital gains. These gains are tax-free up to Rs 1 lakh per year, and any earnings beyond this amount are subject to a 10% long-term capital gains tax.
As mentioned above, Section 80C of the Income Tax Act offers tax deduction benefits on the principal invested by you in an ELSS scheme. This is a cumulative deduction benefit, meaning you can avail of a tax deduction of up to Rs. 1.5 lakh under the above-mentioned section for investments made in all instruments specified, like ELSS, NSC, PPF, etc.
Further, these schemes have a mandatory lock-in period of 3 years. Therefore, on redeeming the units, you receive long-term capital gains or LTCG. These gains are not taxable up to Rs. 1 lakh in one financial year. Any LTCG above this limit is taxed at 10% of the gains exceeding Rs. 1 lakh without indexation.
FAQ
Q1. What is ELSS mutual funds meaning?
ELSS mutual funds are classified as diversified equity mutual funds. This equity fund invests at a minimum of 80% of its assets in stock and equity-related securities, with a portion of its assets being invested in debt.
Q2. Is ELSS risk-free?
ELSS is the most popular tax-saving mutual fund. It is a mutual fund that invests largely in equities and equity-associated securities of companies with high development prospects. Individuals can save money and lower their tax liability by investing in ELSS. These are appropriate for investors who comprehend the equity class risk.
Q3. Can I draw out my ELSS after three years?
Yes, investors can withdraw their assets from ELSS funds following a three-year lock-in period. After three years, the entire amount of a lump sum investment can be withdrawn. In the case of SIP investments, however, each SIP investment must fulfil the three-year term.
Q4. Who should invest in ELSS funds?
These funds are suitable for Salaried Individuals and First-time investors.
Q5. What is the exposure for ELSS funds?
ELSS invests a minimum of 80% of its funds in equities.
Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.
