Section – 80C of the Income Tax Act,1961, provides a tax deduction on investments up to INR 1.5 lakh. There are several investment instruments that compete for this deduction- from a fixed deposit in banks to a National Pension Scheme (NPS) to National Savings Certificates (NSCs) offered by post offices.
Tax Saving Mutual Funds or ELSS is one such instrument.
Let us understand an ELSS in detail.
- Acronym for Equity-Linked Savings Scheme, ELSS is an open-ended equity-oriented mutual fund.
- This means that all investments made towards this are primarily invested in equity or equity-related instruments. A minor 10%-20% of the invested amount could be channeled towards debt or other instruments.
- In comparison with other instruments allowed under Sec-80C for the tax deduction, the Equity-Linked Savings Scheme (ELSS) has the shortest lock-in period of 3 years. You can redeem your mutual fund units only after the completion of 3 years.
- In the case of the Public Provident Fund or PPF, the lock-in period is for a long period of 15 years. Even in a fixed deposit, the lock-in period is 5 years. Both of which are substantially longer than that of ELSS.
- This makes ELSS an attractive and excellent tax-saver instrument.
- The total tax deduction available on an aggregate of all investment instruments is INR 1.5 lakh and not solely on ELSS. In case, you have solely used ELSS as a tax-saving investment option, then you can exhaust the entire tax deduction on ELSS itself.
RETURNS ON ELSS
Most of the instruments allowed under Sec-80C are fixed-income-bearing instruments. However, ELSS, being a mutual fund does not guarantee fixed returns. The volatility may be a matter of concern for older people and the ones who do not have a risk appetite.
But a careful study of the ELSS funds from the past 3, 5, or 10 years has shown that most of them have been performing really well. Yet, you should invest in ELSS after proper research and understanding. While investing in an Equity-Linked Savings Scheme (ELSS), one must always get in with the idea of staying long-term. Of course, you can redeem it after 3 years. But it would be better if you hung on to it for longer.
When people do not withdraw their money from mutual funds, it helps the fund manager to withstand the volatility of the market. In this way, ELSS will be an instrument for wealth creation for you in the long term rather than a mere tax aversion tactic in the short term.
INVESTING AND REDEMPTION
- LUMP SUM PAYMENT- You can invest in a lump sum at any point in time during a financial year. If you invested Rs. 1,50,000 in ELSS in July 2022, you can redeem it only in July 2025. Any interest earned above Rs.1,00,000 is taxable at the rate of 10%.
- SIP- You can also do monthly SIPs towards ELSS. A beginner or even a seasoned investor is advised to choose this route while investing in ELSS. You can invest in SIPs little by little throughout the year which builds discipline in investing. If you have invested Rs.2000 in March 2022 and another Rs.2000 in April 2022, you will redeem the mutual fund units worth the first Rs.2000 in March 2025, the second Rs.2000 in April 2025, and so on.
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