ELSS or equity-linked savings schemes are Mutual fund investment schemes that allow you to save income tax. Therefore, they are also known as tax-saving assets. Under Section 80C of the Income Tax Act, taxpayers are allowed to invest in special securities up to INR 1.5 lakh and claim it as a deduction from their taxable income. One of the approved securities is ELSS - which includes PPF, postal savings like NSC, tax-saving FD, NPS, etc.
The following sections describe some important features of ELSS:
ELSS is an excellent tool for tax savings. Unless you contrast it with traditional means for tax savings, you will find that the potentially high capital gains make it an obvious choice for risk-tolerant investors. In addition, if one invests in ELSS for the long term, the investor can generate higher inflation-proof returns relative to other asset classes.
The primary purpose of the ELSS is tax benefits as well as a capital appreciation for investors and, consequently, potentially high-risk high return assets. Invests in ELSS offer potentially higher returns than other savings schemes such as NSC, PPF, etc., although the latter has a longer lock-in period.
ELSS has no capital upper limit. It ensures that investors can invest as much money as they want in the scheme but, under Section 80C of the Income Tax Act, the tax benefit will be limited to Rs. 1.5 lakhs annually. Investments exceeding the specified limit will not yield any return.
The initial investment in mutual funds had a higher entry fee in the form of an upfront fee paid by the mutual fund company. The entry fee was abolished by a SEBI order in 2009 and did not apply to investments in ELSS or other mutual fund shares. The redemption charge/exit load is not applicable to ELSS. In the case of direct plans, the scheme management fee determined by the scheme's total expense ratio (TER) is lower than regular plans.
The ELSS as a long-term investment tool is affected by short-term volatility, which is balanced over the long-term. Even under harsh market conditions, Investors should not get nervous and redeem their investments during the lock-in period. It removes the burden of redemption on fund managers allowing them to make long-term investment decisions that work best for equity investments.
ELSS comes under long-term mutual funds, in fact, the lock-in period is the lowest among all tax-saving schemes. The 3-year lock-in period means that investors can withdraw their investment after maturity, but after the lock-in period ends, one can choose to remain invested in the scheme. This extended period does not mean that the investment will be closed again for an additional three years. In fact, after the 3-year lock-in period of ELSS ends, anyone is free to withdraw their investment at any time.
ELSS allows investors to invest through the SIP route. This simplifies investment because most investors do not want to invest all their assets in the market at once when they have the opportunity to make small investments every month to build a larger portfolio over time.
ELSS Tax Benefits
During a financial year, the amount invested in an ELSS is eligible for income tax exemption. Under Section 80C of the Income Tax Act 1961, ELSS is eligible for tax exemption up to an annual limit of Rs. 1.5 lakhs. Once the lock-in period ended, redemption was completely tax-free until March 2018. It has now been converted into a long-term capital gain (LTCG) of 10 per cent, which applies to total equity. 1 lakh during a financial year. Such redemptions do not provide indexing values.
Note: ELSS mutual funds have the dual benefit of tax savings and higher investment returns as compared to bank FD, PF, NSC and other tax saving options.