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Usually tax plans are issued at the end of each tax year. Tax saving mutual funds (ELSS) combine equity investing and tax planning. They invest in stocks with an eye to long term growth. Returns are tied to the market and are neither guaranteed nor fixed.
What are ELSS Mutual Funds?
ELSS stands for Equity Linked Savings Scheme. It is a tax saving investment mutual fund (equity) As per mutual fund rules, ELSS schemes are required to invest at least 80% of their assets in shares and related assets.
Every eligible investment shall be subject to the Rs. 1.5 lakh limit for annual tax deduction as per the applicable law. This is commonly called Section 80C benefit. This benefit is subject to applicable tax regime and law. It is available under the old tax regime by default and not under the new tax regime.
How the tax advantage works
Say a person has already spent ₹50,000 on other items within the eligible limit. The person can invest another ₹1 lakh in ELSS and claim it under the combined limit, provided all the rules are followed.
This deduction reduces your taxable income. That is not to say the entire amount comes back in tax savings. The real impact will depend upon the taxable income, the slab rate, the cess and the regime you choose.
You can contribute more than the maximum contribution limit, but you cannot claim a second deduction for the excess contribution.
The Three Year Lock Up
The lock-in period for each ELSS investment is three years from the date of allotment of units. This period does not allow units to be redeemed.
With lump sum investments, the entire investment is made in a single day. Every systematic investment plan investment has its own three year term. A payment in July can be redeemed in July after three years, a payment in June in June after three years.
Three years later, the lock-in is over but redemption is not automatic. If the plan and goal still make sense for the plan, units may remain invested.
How ELSS helps in wealth creation
As per the scheme mandate, ELSS mutual funds invest in listed companies across sectors and market caps. Equity can help you grow your capital over the long term, but its price can go up and down.
The lock-in can reduce the exit frequency. Three years is no guarantee of profit. Equity objectives may need a longer time horizon so the investor can ride out the ups and downs of the market with no reliance on a specific exit date.
Returns can differ depending on the portfolio, the fund’s strategy, costs, market conditions and the length of time the investment is held. Past performance is not indicative of future results.
How to Invest Step-By-Step
1. Check if the tax deduction is applicable under your chosen regime. 4. Avoid buying in the last days of the financial year.
Secondly, define your target, timeframe and acceptable risk level. ELSS is an equity product and can be highly volatile in value.
Third, shop plans. Assess the investment style, benchmark, portfolio allocation, expense ratio, fund manager performance and long-term consistency. Never choose a fund based on one year’s performance.
4. Choose lump sum or systematic investment plan. A lump sum means you get all the money at once. A systematic plan spreads the purchases over dates and encourages regular saving.
Fifth, know your customer checks and invest through a registered platform, asset management company or broker. Keep statement as tax proof and note date of lock in of each installment.
Redemption Charges
Since ELSS is linked with equity, the gains on redemption are according to the rules for equity mutual funds. As per the existing norms, long term capital gains on eligible equity assets above the annual exemption of ₹1.25 lakh is taxed at 12.5% subject to conditions. Tax laws change, so check the rules before you sell or file a return.
Risks and Limitations
ELSS is subject to Market Risk. The money is not available during the lock-in and the value could fall. It may not be appropriate for emergency savings or a soon goal.
Don’t buy more than one ELSS scheme unless there is a very strong reason. Overlap makes tracking difficult without adding useful variety.
Bajaj Broking
Learn about mutual funds, investment and tax concepts with Bajaj Broking. Its digital platform and knowledge centre can help readers understand the process. Choose a plan according to your personal goals, risk capacity, costs and tax rules.
Summary.
ELSS mutual funds are a tax saving instrument having equity exposure. They have a lock in of 3 years and market linked returns. Look for tax advantages. Create a long-term goal. Shop around for schemes and invest regularly. The tax benefit may be the trigger to start the decision making process but the final decision should be based on suitability and risk.
