From tax-benefits to high returns, ELSS has many features and benefits that you can avail.
When you begin your career, you have the chance – depending on your salary – of immediately falling into the income tax bracket. There are some methods of investment that can help you save on tax, and one popular one that most mutual fund experts ask you to invest in is an equity-linked savings scheme (ELSS).
The mutual fund advisor isn’t wrong. An ELSS is a popular tax-saving scheme amongst investors, as they have shorter lock-in periods and have the potential to deliver higher returns. The most important thing, however, is that the offer tax benefits under Section 80C of the Income Tax Act.
ELSS as a tax-saving option
- 1 ELSS as a tax-saving option
- 2 Here are some of the advantages of investing in an ELSS
- 3 Disadvantages of ELSS
- 4 How do I invest in an ELSS?
- 5 FAQs
What makes ELSS a popular tax-saving option compared to a fixed deposit, a public provident fund, a national savings certificate or the national pension scheme are the returns you get, and the short lock-in period.
While ELSS has a lock-in period of three years, a tax-saving fixed deposit has a lock-in period of five years, PPFs have a 15-year lock-in period; while NSCs and NPS have lock-in periods of five years and until retirement respectively.
When it comes to returns, ELSS gives you anything between 15 per cent and 18 per cent returns. In comparison, you will get anything between 6.5 per cent and 8 per cent for an FD; a PPF and NSC guarantee you 8 per cent returns; while the NPS assures a 10.81 return, but under certain terms and conditions.
One other advantage of ELSS is that unlike an FD where you put in a lump sum amount, you can invest in SIPs that can be as low as Rs 500 per month.
Finally, when it comes to taxation, you can have a tax deduction of Rs 1.5 lakh under Section 80C of the Income Tax Act. However, the returns you gain are partially taxable. The long-term capital gains from an ELSS is exempt of tax, but only up to Rs 1 lakh.
|Investment option under Section 80C of I-T Act||Annual returns|
|Public Provident Fund||8%|
|National Savings Certificate||8%|
|National Pension Scheme||10.81%*|
Here are some of the advantages of investing in an ELSS
Short lock-in period: As mentioned earlier, ELSS has a three-year lock-in period compared to other tax-saving options that have lock-in periods ranging from five years right up to an investor’s retirement.
Tax-saving option: Investing in an ELSS means you are investing in a tax-saving tool under Section 80C of the Income Tax Act of 1961. Also, long-term capital gain you get from an ELSS is exempt up to Rs 1 lakh under the Act. Dividend in an equity-oriented mutual fund is taxable from 1st April 2018, at the rate of 10 per cent.
ELSS plans: As an investor, you are given two options before you agree to invest in an ELSS. The first option gives you the chance to earn a regular dividend during the three-year lock-in period if you invest in a dividend plan. The second option gives you the option to earn a lumpsum after the lock-in period. This plan is called a growth plan. If you fall short of your investment milestone, then you have the option of switching from a dividend plan to a growth plan.
Good returns: ELSS funds give you a diversified portfolio along with a chance of getting higher returns. Also, a diversified portfolio mitigates the risk of a volatile stock. Moreover, if the stock market is doing well, then you have a chance of getting higher returns through an ELSS.
Investing through SIPs: ELSS gives you the option of investing either in a lumpsum or a SIP. Also, dividend plans allow you to withdraw a fixed sum periodically, during the lock-in period. This ensures you have a regular cash-flow.
No investment limits: Irrespective of your age, an ELSS mutual fund is a perfect investment. There is no maximum limit to invest, although you will be exempt Rs 1.5 lakh under the Income Tax Act in case you are looking at ELSS fund as a tax-saving option.
Get Better Returns With ELSS: An ELSS fund has the potential to generate higher returns, as compared to other investment avenues because they’re 80 percent equity oriented. Moreover, with the option of systematic investment, you can plan your investments and taxes well in advance.
Disadvantages of ELSS
– Difficult to choose the fund in which you want to make your investment. Ideally, seek the help of a fund manager to choose the right ELSS for you
– Documentation is a lot
– Returns are not guaranteed as ELSS are subject to market risks
– You cannot make a premature withdrawal during the three-year lock-in period as you will be charged
– Difficult for NRIs to invest in ELSS
How do I invest in an ELSS?
If you are new to investments, ideally approach your financial consultant to give you a list of ELSS options to choose from. You can also check MoneyControl’s list of best ELSS in the market and choose from one of them.
In case you have doubts about choosing the right ELSS, visit an ELSS calculator, which will have details such as how you wish to invest
- You have the option of investing in SIPs or lumpsums. Choose your option based on your investment choice
- Enter the amount you wish to invest as a SIP or as a lumpsum
- Mention the period i.e. 36 months or more
- Check your returns
Once you have chosen your ELSS scheme, you will be required to submit your KYC documentation. This includes
- Passport photograph
- Proof of identity (any one of the following): Passport, PAN, Aadhaar, Driver’s licence, Voter ID
- Proof of address (any one of the following): Passport, PAN, Aadhaar, Driver’s licence, Voter ID, utility bill, ration card
- First payment as a cheque to the ELSS provider
What is the maximum tax benefit under ELSS?
One can avail tax benefits up to Rs 46,800 under the Income Tax Act of 1961. This is when you invest Rs 1.5 lakh in your ELSS.
What is the biggest advantage of investing in an ELSS?
The high returns that are assured, clubbed with the low lock-in period.
Is ELSS a safe investment option?
ELSS is a popular investment option, but if you’re someone who is not to take an investment risk, you may want to consider investing in a PPF or a NSC. While they have lower returns compared to an ELSS, they guarantee financial safety.
Can I withdraw my ELSS before the three-year lock-in period?
No, according to the rules, you will not be able to withdraw the money. If you do, you will be penalized an amount.