In India, tax planning is an essential aspect of personal finance. It involves arranging your finances in such a way that you can minimize your tax liability. While there are various tax-saving investment options available in the market, Equity Linked Savings Scheme (ELSS) Funds are considered one of the best tax-saving investment options available. In this article, we will discuss what ELSS Funds are, how they work, and why they are the best tax-saving investment option for you.
What are Equity Linked Savings Scheme (ELSS) Funds?
ELSS Funds are a type of mutual fund that invests predominantly in equity shares of companies. These funds are designed to provide tax benefits to investors under Section 80C of the Income Tax Act, 1961. As per this section, investors can claim a tax deduction of up to Rs. 1.5 lakh for the amount invested in ELSS Funds. These funds come with a lock-in period of three years, which means investors cannot withdraw their money before three years from the date of investment.
How do ELSS Funds work?
ELSS Funds work like any other mutual fund. Investors can invest in these funds by purchasing units, and the fund manager uses this money to invest in the equity shares of various companies. The returns on these funds depend on the performance of the underlying companies in which the fund has invested. Since these funds invest in equity shares, they carry higher risk compared to other fixed income tax-saving investments like Public Provident Fund (PPF), National Savings Certificate (NSC), or tax-saving fixed deposits (FDs). However, they also offer the potential for higher returns in the long run.
Why are ELSS Funds the best tax-saving investment option for you?
High Returns: ELSS Funds offer the potential for high returns over the long term. Historically, equity markets have delivered better returns than other asset classes like fixed income or gold. Since ELSS Funds invest predominantly in equity shares, they can deliver higher returns compared to other tax-saving investment options like PPF, NSC, or tax-saving FDs.
Short Lock-in period: Unlike other tax-saving investments like PPF, NSC, or tax-saving FDs, ELSS Funds have a lock-in period of only three years. This means investors can redeem their investments after three years, providing them with more flexibility to manage their investments.
Tax benefits: As mentioned earlier, investments in ELSS Funds are eligible for tax deductions under Section 80C of the Income Tax Act. Investors can claim a tax deduction of up to Rs. 1.5 lakh for investments made in ELSS Funds. Additionally, the long-term capital gains (LTCG) on these funds are tax-free up to Rs. 1 lakh. Any LTCG above Rs. 1 lakh is taxed at a rate of 10%. This makes ELSS Funds one of the most tax-efficient investment options available.
SIP Investment: ELSS Funds can be invested through the Systematic Investment Plan (SIP). SIP allows investors to invest a fixed amount of money at regular intervals, providing them with the benefit of rupee-cost averaging. Rupee-cost averaging means that investors can buy more units of the fund when the market is down and fewer units when the market is up. This helps in reducing the average cost of the investment.
Diversification: ELSS Funds provide investors with the benefit of diversification. Since these funds invest in equity shares of various companies, they are less susceptible to the risks associated with investing in a single company. This helps in reducing the overall risk of the investment portfolio.
Professional Management: ELSS Funds are managed by professional fund managers who have a deep understanding of the equity markets. They use their expertise to pick the right companies to invest in, which helps in generating better returns for investors. Investors do not have to worry about selecting the right companies to invest in or tracking their performance regularly.
Transparency: ELSS Funds are highly transparent. The Securities and Exchange Board of India (SEBI) regulates mutual funds, and they require mutual fund houses to disclose their portfolio holdings every month. Investors can track their investments and keep a check on the portfolio holdings regularly.
Liquidity: ELSS Funds provide investors with liquidity after the lock-in period of three years. Investors can redeem their investments after three years, providing them with the flexibility to manage their investments based on their financial goals.
Also Read: Beginner's Guide to Income Tax: Overview of Exemptions, Deductions, TDS
Different Types Of Mutual Funds Available For Investing
How to invest in ELSS Funds?
Investing in ELSS Funds is a simple process. Investors can invest in ELSS Funds through any mutual fund distributor or online platforms like Paytm Money, Groww, Zerodha, and others. Investors need to complete the Know Your Customer (KYC) process, which involves submitting their PAN card, Aadhar card, and other necessary documents. Once the KYC process is completed, investors can select the ELSS Fund they want to invest in and the amount they want to invest. Investors can also opt for the SIP route to invest in ELSS Funds.
Things to consider while investing in ELSS Funds
Risk appetite: ELSS Funds invest in equity shares of various companies, which makes them a high-risk investment option. Investors need to assess their risk appetite before investing in these funds.
Investment Horizon: ELSS Funds are suitable for investors with a long-term investment horizon. Investors should invest in ELSS Funds only if they have a minimum investment horizon of three years.
Past Performance: Investors should not solely rely on past performance while selecting an ELSS Fund. Past performance does not guarantee future returns. Investors should assess the portfolio holdings and the fund manager's expertise before investing.
Portfolio Diversification: Investors should not invest all their money in a single ELSS Fund. They should consider investing in multiple funds to diversify their portfolio holdings.
Exit Load: Investors need to be aware of the exit load charged by the mutual fund house. Exit load is a fee charged by the mutual fund house if an investor redeems their investment before the end of the lock-in period.
Conclusion
ELSS Funds are an excellent tax-saving investment option for investors who have a high-risk appetite and a long-term investment horizon. These funds offer the potential for high returns and come with a short lock-in period of three years. Additionally, ELSS Funds provide investors with the benefit of diversification, professional management, and transparency. Investors should assess their risk appetite and investment horizon before investing in ELSS Funds. They should also consider investing in multiple funds to diversify their portfolio holdings. Overall, ELSS Funds are a great way to save taxes while generating wealth in the long run.