The only benefit of ELSS you must know about

Equity Linked Savings Scheme or ELSS as it is popularly known as, is a tax saving mutual fund scheme that comes with a three year lock-in and a tax benefit. The investment objective of an ELSS scheme is to offer long term capital appreciation and tax exemption. In fact, ELSS is the only equity mutual fund scheme that comes with a tax benefit. The difference between other tax saving schemes and ELSS is that ELSS comes with the shortest lock-in period. ELSS comes with a predetermined lock-in period of 3 years that gives the invested amount an opportunity to earn from equity markets.

Here’s a simple example to determine how ELSS can help save tax –

SangramShelar, a marketing professional earns Rs. 10 lakhs per annum. This lands him in the highest tax slab. Sangram learns about ELSS from a colleague and decides to invest Rs. 1.5 lakhs in it. According to the Section 80C of the Indian Income Tax Act, 1961 investments of up to Rs. 1.5 lakhs made in an ELSS scheme are eligible for tax benefits. So, by investing Rs. 1.5 lakhs in ELSS Sangrammanaged to bring down her gross taxable income to Rs. 8.5 lakhs. Also, since ELSS is an equity mutual fund scheme the 3 year lock in period might help Sangram accrue some interest on the investment amount.

Tax exemption – the only benefit of ELSS you must know about

ELSS is an open ended tax saving scheme which also gives investors an opportunity to create long term wealth. Since you are redeeming ELSS units only after three years, the capital gains that you earn will be exempted from short term capital gains tax which currently sits at 15 percent. Long term capital gain tax is the same as levied on all other equity mutual funds. If the long term capital gains earned exceed Rs. 1 lakh then a 10 percent LTCG tax is levied. Returns below Rs. 1 lakh from ELSS are tax free.

Investors can start a SIP to continue save tax and earn long term capital appreciation. If you are a salaried individual, you are going to have to save tax till you retire. Starting a monthly SIP in ELSS will ensure that you continue earning capital appreciation based on the performance of the equity markets and at the same time, save tax every fiscal year.

Things to consider before investing in ELSS

Although ELSS doesn’t have an upper limit, one cannot seek tax exemption for an amount exceeding Rs. 1.5 lakhs per fiscal year. ELSS is a mutual fund scheme that doesn’t guarantee capital appreciation. Hence investors must keep their financial goals and their risk appetite in mind before investing. ELSS schemes perform better to over the long term. They have outperformed other tax saving schemes over the long run. It is better to have a long term investment horizon while investing in ELSS funds.

Investors must only invest in ELSS if they can afford to lose their finances to market volatility over the short term. That’s because since these funds heavily invest in equity and equity related instruments, the performance of an ELSS scheme portfolio is bound to get affected by constant fluctuations in the equity markets. Also, ensure that your ELSS fund portfolio is handled by a team of reputed fund managers. The expense ratio of an ELSS fund should not be more than 2 percent, otherwise it may affect your long term capital gains.

If you need further assistance in understanding ELSS scheme, feel free to consult a financial advisor.