Evaluating ELSS Funds to Save Taxes

14 June 2023
5 min read
Evaluating ELSS Funds to Save Taxes
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Taxpayers begin looking for ways to invest in reducing their tax burden as soon as tax filing season arrives each year. There are many ways to reduce taxes, but picking one that will save you money and increase it is crucial in the long run. While there is still some time before the tax deadline, now is the best time to plan investments that will save taxes because various options are available.

The time is now to act and determine which tax-deductible expenses can be reduced to help you pay fewer taxes to the government.

Saving taxes is a great idea that can help you earn more money and is also part of a systematic planning strategy. But unfortunately, most people do not make year-round plans for investing in tax-saving investment schemes and only do so when the deadline is approaching.

One of their biggest mistakes is to do this. They consequently invest in products and schemes that are inappropriate for them and do not support their long-term financial objectives. One's future financial goals may be hampered in the long run if they have a vision that only focuses on tax savings and not wealth growth.

Today's market offers a wide variety of investment options. In addition, investors look for opportunities that provide significant returns at minimal expense. The investment vehicle ELSS expands both of these characteristics and lays the groundwork for a simple investing process.

An Equity-Linked Saving Scheme (ELSS) is a Mutual Fund that allocates most of its assets in equity and equity-related financial instruments. The only Mutual Fund schemes that qualify for tax deductions under Section 80C of the Income Tax Act are Equity-Linked Service Schemes.

Therefore, when investing in these schemes, investors benefit from tax exemption. As a result, these are also referred to as Tax-Saving Funds.

Tax Saving – The ELSS Way

Simply put, ELSS Funds are Flexi-Cap Funds that fall under Section 80C and allow annual tax deductions of up to ₹1.5 lakh. ELSS is the most well-liked investment option among tax-savers because it has the briefest lock-in period of 3 years among other Tax-Saving Investment options.

The majority of the investments made by ELSS Funds are in equity and instruments with an equity component. As a result, ELSS Funds, also known as Flexi-Cap Funds, are the ones that financial advisors prefer the most for portfolio diversification to temper market volatility because they invest throughout market capitalizations, which include Large, Mid, and Small Caps, with 65% of the portfolio apportioned toward equity.

ELSS Mutual Funds can offer returns that outpace inflation if investors hold onto their investments for a long time. Systematic Investment Plans (SIP) are a method of investing in ELSS that allows investors to start with a minimum of ₹500 per month. The performance of the underlying securities determines how much an ELSS investment will return, and the funds are standardized to the Nifty 500 TRI.

The liquidity of these instruments is demonstrated by the fact that you can withdraw some or all of your ELSS components after the three-year lock-in period has passed. In addition, capital gains from ELSS that do not exceed ₹1 lakh in a fiscal year are tax-free but increases over ₹1 lakh are subject to a 10% Long-Term Capital Gains (LTCG) tax.

Evaluating ELSS Funds to Save Taxes

Some of the most famous attributes of ELSS Funds are-

  • ELSS Funds Are Tax Efficient

You did read that correctly. Mutual Funds with an ELSS rating help with tax reduction in addition to helping investors earn higher returns.

If the total capital gain exceeds Rs. 1 lakh in the year of withdrawal, 10% of all long-term capital gains realized from ELSS mutual funds are subject to taxation. Even better, if the total profit for the financial year is less than Rs. 1 lakh, there is no capital gain tax to pay.

  • ELSS Funds Have a Brief Lock-in Period

The lock-in periods for all conventional tax-saving investments are incredibly long, while those for ELSS Funds are only three years. In addition, programs like PPF, which has a lock-in period of 15 years, and NPS, which has a lock-in period until retirement, are nowhere near as profitable as ELSS funds.

The money invested in ELSS Mutual Funds generates higher returns in a shorter time and does not require a lengthy time block.

  • ELSS Funds are Convenient

Even a small investment can be made in ELSS Mutual Funds. There is neither a minimum nor a maximum. You could indeed make a high return on your assets and reduce your tax burden if you endure market fluctuations and wait for a while.

  • ELSS Funds Provide Inflation-Beating Returns

Funds under the Equity-Linked Savings Scheme invest primarily in the Stock Market. As a result, they could produce higher yields than conventional tax-saving strategies.

  • ELSS Funds Require Low Initial Investment

The minimum investment amount for ELSS Funds is only ₹500. This means an ELSS Fund can start with as little as ₹500.

  • Liquidity of ELSS Funds

Even if an investment offers tax benefits, Liquidity—the capacity to convert it into cash—is always preferred to investments with more extended lock-in periods. A sudden need for money can also arise, for which one should be ready.

Section 80C stipulates that one must hold onto the eligible investment for a predetermined time to qualify for the tax benefit. Here, ELSS has a significant advantage. ELSS has the shortest lock-in period of 3 years out of all eligible investments under section 80C.

  • Reduced Risk

ELSS are equity-oriented funds that buy shares of businesses in various industries and market caps. Even though investing in equity can be profitable in the long run, it is riskier than investing in debt securities.

However, if you have used the services of qualified fund managers to manage your investments, investing in equity through ELSS somewhat lowers your risk. Additionally, spreading your investment across the shares of several different companies reduces your investment risk.

Conclusion

In conclusion, ELSS has many advantages besides its tax exemption feature. It is crucial to conduct research and learn about the risks associated with each ELSS before investing. There is no maximum period for investment, so if a scheme is profitable for you, you can decide to keep investing in it.

Disclaimer: The information provided here is purely for informational purposes and is not intended as a recommendation to trade or make an investment.

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