ELSS or Equity Linked Savings Scheme is a dedicated mutual fund scheme which helps you save tax. When you invest your money into a mutual fund - ELSS scheme, you get a deduction under section 80C of the Income-tax Act, 1961 of an amount up to INR 1,50,000.
An ELSS fund manager invests in a diversified portfolio, predominantly consisting of equity and equity related instruments that carry high-risk and have the potential to deliver high returns. Hence, ELSS is an equity mutual fund bearing similar risks and returns.
1. Lock-In period of ELSS of 3 years and more.
You have to stay invested for 3 years into an ELSS fund to continue the benefit of tax savings. However, many people believe that after 3 years you have to sell the ELSS. This is not true. You can stay invested for as long as you prefer based on your goals and market movements. There is no upper limit. In fact, if you want you can sell your ELSS before 3 years as well, you just have to bear the penalty and pay the tax you saved by investing in ELSS in the first place.
In fact, compared to other 80C investment options available, ELSS has the least waiting period. Like PPF has 15 years, the fixed deposit has 5 years and ELSS has only 3 years.
2. You can invest more than INR 1,50,000 into ELSS
Given that ELSS is an 80C investment option, many people assume that only INR 150,000 can be invested in any ELSS scheme. You can invest a minimum of INR 500 and maximum of anything into ELSS (like any other mutual fund).
3. It gives a higher return and hence, higher risk
ELSS are equity-based mutual funds and hence, the return on the same is higher. High returns mean higher risks. There is a good possibility that at the end of 3 years, there are negative returns in ELSS. As we have always said, equity investments are for long term goals and you must stay invested in equity for at least 7 years to avoid the risk of nil or negative returns. Countless studies prove that one can beat volatility and make superior returns from stocks by staying invested for a long period. You should remind yourself that equity has the potential to offer superior returns than other asset classes over a long period.
4. Growth or Dividend - ELSS Fund
If you choose the Growth option it ensures compounding your capital in the mutual fund investments. The final amount can be redeemed once at the end of the lock-in period.
But, the dividend option gives you some amount for various periods of time. It offers some liquidity even during the lock-in period. This dividend paid out can be further invested in other mutual funds depending on the investor’s portfolio or re-invested back into ELSS Fund.
The dividend received by the investors from these mutual funds is tax-free in the hands of the investors.
5. The tax of ELSS mutual funds
ELSS funds are equity mutual funds. Capital gain tax on ELSS funds is the same as in equity mutual funds.
If you sell your equity mutual funds after a year, the returns will qualify for long-term capital gains a tax (LTCG).
Investors will have to pay 10 % tax on profit gains exceeding ₹ 1 lakh made from the sale of stocks or equity oriented mutual fund schemes held for over one year. If you sell your equity mutual funds before a year, you will have to pay short-term capital gains tax of 15 percent on your returns.
Hence, ELSS helps you to save taxes by allowing a deduction of 1,50,000 but they are themselves not a tax-free product and returns from ELSS are taxable exceeding 1 lakh INR.
Wealth Cafe tip - Do not just look at the returns and invest in ELSS, invest with the same mindset in ELSS as you would in any other mutual fund. Also, do not just sell ELSS after 3 years. Sell them only when your goals for which you investing in ELSS is achieved or reaching near.