1. Equity Linked Savings Schemes (ELSS) is a special type of equity fund investment which gives the investor tax deduction benefits under section 80C of the Income Tax Act up to a limit of Rs.1,50,000 per year.
2. An ELSS must hold at least 80% of the portfolio in equity securities. The investment made has to be locked-in for a period of three years
3. Here are the following details for comparison of ELSS with other schemes:
4. As you can see from the table the risk is very high, but if a person invests by taking correct advice from experts the returns can be very high as compared to other schemes.
5. Investors can buy the units to claim tax deduction at any time of the financial year.
6. Funds can also offer ELSS as a closed-end scheme. Investment in both, the open and closed end ELSS is subject to a 3-year lock-in. The lock-in period will apply from the date of purchase of units. During the lock-in period, investors cannot sell, redeem, pledge, transfer, or in any manner alter their holding in the fund.
7. New Fund Offers of ELSS are kept open for 30 days. Allotment of units at the issue price (typically at the face value of the units) is made within 5 business days from the closure of the NFO.
8. Along with tax deduction, ELSS funds provide scope for long-term capital appreciation and higher inflation-adjusted returns. It offers an opportunity to gain from market-linked returns from equity. Investments in ELSS are, however, subject to market risk and must be made taking into consideration age and risk taking ability. A young investor may have the capacity to bear some volatility in order to gain from the significant capital appreciation that ELSS funds seek to deliver. Moreover, no tax is levied on the long-term capital gains from these funds. Regular income in the form of dividends is also tax-free.
ELSS stands for Equity Linked Savings Scheme. ELSS is basically a diversified equity mutual fund where majority of the money is invested into equities. Investors of ELSS enjoy two benefits primarily: one is the investor gets market edge for investment and another is it gets tax saving under section 80C of Income Tax Act.
SIP (Systematic Investment Plan) under ELSS has a lock-in period of 3 years. ELSS comes with two options: one is growth and another is dividend. In growth option of ELSS, one gets the lump sum amount after the lock-in period completion. However, in case of dividends, investors receive dividends, if generated, even during the lock-in period. Returns under ELSS are tax-free for an investment of up to 1.5 lacs.
ELSS has high liquidity as it has lower lock-in period compared to other instruments providing tax benefits. If one wants to start the investment in funds market, then ELSS is one of the best options to start with as it provides a 3 year lock-in period which helps an investor to learn the behaviour of his/her funds and hence the return to investment ratio.
Equity Linked Savings Scheme funds are also known as tax savings mutual funds. They are the most popular in the equity funds category due to the tax benefits provided by them under section 80C of the Income Tax Act. Investor can save up to a amount of 1.5 lakhs by investing in these funds. But these funds have a lock-in period of 3 years. Investors cannot redeem their money before the maturity date. Most of the mutual funds in India generally don’t have a lock-in period but ELSS funds are exception in this aspect. Below are the top performing ELSS funds:
No other equity mutual funds qualify for the tax exemption under section 80C of the act. However, equity can offer other tax benefits to the investor. For example, investors can get tax free dividends from the equity funds. If you hold your equity mutual funds for more than a year, the returns will qualify for long term capital gains tax. If you sell your equity funds before a year, 15 % tax is levied on the short term capital gains.
Investors can also invest in these funds through Systematic Investment Plan (SIP) to minimize the market risk. These funds are great way to save tax on your hard earned money. Based on the returns, risk and rating, I would suggest you to invest in the below 3 funds:
Equity Linked Savings Scheme or ELSS is a type of mutual fund wherein a major portion out of the total fund is invested in equity and related products. As evident from the name of the scheme, it comes with a benefits attached to it, in the form of tax savings. Two important features of the ELSS scheme are lock-in period and Net Asset Value (NAV) or price of the fund which is declared at the end of each business day.
Lock- in – Unlike other mutual fund schemes, ELSS is different from the sense that there is a minimum lock-in period of 3 years in any/all ELSS schemes. Under ELSS schemes, pre-mature withdrawal is not allowed before the completion of lock-in period.
Tax benefits- Although there is no upper ceiling for investing in an ELSS scheme, however tax benefits for ELSS are available to the tune of Rs. 150000 under section 80C of the Income Tax Act. There is no such tax saving or benefit available for other mutual fund schemes.
Like other mutual funds, any dividend received by the investor is tax-free. Similarly, Long Term Capital Gains (LTCG) arising upon sale of mutual funds after a period of one year is also tax-free/exempt.
Who can invest in ELSS?
All resident Indians being individuals or HUFs can invest in ELSS schemes. NRIs living in US and Canada are not allowed to invest in some ELSS schemes. However, NRIs from other countries are allowed to invest.
Options available for investing in ELSS?
1. Growth option – In this option, no dividends are distributed to the investor, during the period it holds the funds. Any such income results in increasing the NAV of the fund.
2. Dividend option- In this option, the dividend income is distributed among the investors. Date of distribution of any dividend is declared by the fund and such dividend is not taxable in the hands of the investor.
3. Dividend reinvestments option – In this option, any dividends declared by the funds are reinvested automatically.
Investments in ELSS can be made in lump-sum or through a Systematic Investment Plans (SIP). Investment via SIP helps to average out the cost of the investment and involves shell out of lesser money at one time. However, it is important to note that each SIP shall have a lock-in of 3 years.
You can have a look at the top tax saving ELSS mutual funds here.
ELSS stands for Equity Linked Savings Scheme. It is a diversified mutual fund that invests primarily in equities. The amount you invest in an ELSS fund will be deducted from your taxable income of the same financial year.
- the investments are exempted under section 80C of Income Tax.
- the investments are locked for 3 years. This is lowest lock-in among all tax saving options.
- the returns earned in these funds are also tax free
Here are 2 good ELSS funds - one should do SIP in these funds to reduce market risks.