Equity Linked Savings Scheme is an open ended mutual fund scheme that comes with a three year mandatory lock in period and a tax benefit. ELSS is the only mutual fund scheme which according to Section 80C of the Indian Income Tax Act, 1961 that comes with a tax benefit. There are multiple schemes that come under Section 80C which investors can consider for tax benefit but ELSS holds the potential to offer far better capital appreciation than any of those schemes.
Investors can invest up to Rs. 1.5 lakh in an ELSS scheme and claim tax benefits worth Rs. 46,800. There is no upper limit for investing in ELSS ,but investors cannot claim tax benefits more than Rs. 1.5 lakh worth of investment annually. Another good thing about ELSS is that it comes with a three year lock-in period. Which means that you cannot sell your investments for at least three years. As ELSS invests majorly in the equity market, a three-year window gives the scheme a chance to grow. Keep in mind that ELSS has the shortest lock-in period as compared to other tax-saving investment schemes.
Here’s an example to help you understand how ELSS works:
Sudhir Banerjee is a professional fashion photographer with a taxable income of Rs. 13.5 lakhsper year. This lands Sudhir in the highest tax bracket. Sudhir learns about ELSS through a colleague and decides to invest Rs. 1.5 lakh. According to 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1,50,000 in ELSS and claim tax deductions for the same. By investing in ELSS Sudhir’s gross taxable income has now come down to Rs. 12 lakhs per annum.Also, the three year lock in will ensure that the invested amount continues to accrue interest and might even help him building wealth in the long term.
What are direct and regular plans?
A direct ELSS fund plan is offered directly by the fund house / Asset Management Company. In a direct ELSS fund plan, there are no third party involvements and hence the expense ratio for owning an ELSS fund is generally low as compared to that of a regular plan.
On the other hand, aregular ELSS fund can be purchased by retail investors through a broker, a mutual fund agent or a third party aggregator. ELSS fund investors do not have to visit the fund house personally to buy invest in this tax saving scheme. They can do the same by buying a regular ELSS fund plan through various intermediaries stated above.
Choose between SIP and lump sum investment
There are multiple ways to invest in ELSS – one can either make a one time lump sum investment or they can opt for a Systematic Investment Plan. A lump sum investment is generally made right at the beginning of the investment cycle. A Systematic Investment Plan on the other hand is an easy and convenient way to invest in ELSS funds. Investors can also refer to SIP calculator, a free online tool to help them determine the amount they need to invest every month to get closer to the targeted corpus. Once the investor decides on the monthly SIP amount and completes a one time mandate with his / her bank, every month on a fixed date a predetermine amount is debited from the investor’s savings account and electronically transferred to the fund. However, this investment amount cannot be lesser than the minimum investment amount mentioned in the offer document.
ELSS is an equity oriented schemes which makes it a high risk investment. Hence, investors are expected to consult their financial advisor before investing.