There are several benefits to investing in mutual funds, usually known as ELSS. They offer significant tax benefits and help you save more. These savings schemes come under Section 80C of the Income Tax Act of 1961, allowing investors to claim deductions from taxes.
Read this article to know everything about the benefits of tax in mutual funds.
What is ELSS?
Equity Linked Savings Scheme (ELSS) is a category of mutual funds that focuses mainly on equity-linked stocks and securities. ELSS funds are intended to fulfil these purposes simultaneously to ensure tax benefits and capital appreciation. It means that if an investor wants to enjoy tax exemptions with high possible returns, they must stay invested for at least three years, as noted by the fact that they have mandatory lock-in periods.
Features of ELSS
Equity Linked Savings Schemes (ELSS) are a popular investment option in India, and here are the key features of ELSS:
1. Lock-in Period
The lock-in period for ELSS funds is three years, the lowest compared to other tax-saving instruments such as the Public Provident Fund (PPF) and National Savings Certificate (NSC). This enables investors to have liquidity even as it emphasises long-term investment.
2. Equity Market Linkage
Since ELSS are funds that invest in different industries by buying stocks of various companies, this broadens the shares they purchase and reduces the risk of investing in just one company’s stock. Nevertheless, this kind of investment still offers investors a chance to accumulate wealth due to increasing stock prices.
3. Dual Benefits
ELSS funds provide dual benefits of tax savings and capital appreciation. Investors can claim a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. They can also benefit from the potential growth of their investments in the equity market.
4. Moderate to High-Risk Appetite
ELSS funds best suit investors who can tolerate medium to high-risk levels and have invested in the stock market. Such funds can be decent in terms of the returns they offer but are vulnerable to changes in market conditions.
Tax Benefits of ELSS
Here are the key tax advantages of investing in ELSS:
-
Section 80C Deduction
Investing in ELSS can offer a deduction of up to Rs. 1.5 lakh per financial year under Section 80C of the Income Tax Act. It reduces the overall tax liability by reducing the taxable income of the investor.
-
Long-Term Capital Gains
If you hold on to the ELSS fund units for more than three years, they will be treated as Long-Term Capital Gains (LTCG). Current tax policy allows individuals with incomes below Rs. 1 lakh a year to not pay any taxes on such gains, while those above it have to pay 10%. All these benefits contribute towards improving the total earnings in ELSS investments.
Advantages of ELSS Over Other Tax-Saving Instruments
Equity Linked Savings Schemes (ELSS) offer several advantages over other tax-saving instruments, making them a preferred choice for many investors. Here are the key benefits:
1. Higher Return Potential
ELSS funds can deliver superior returns than traditional fixed-income tax-saving instruments because of investments made in stocks. Over time, stocks usually perform better than other forms of assets, rendering ELSS ideal for building wealth.
2. Inflation Protection
ELSS investments are linked to equities and have a better chance of beating inflation over the long term. Fixed-income instruments like PPF and NSC may not provide returns that keep pace with inflation, leading to erosion of purchasing power.
3. Diversification
ELSS funds offer the advantage of diversification as they invest across various sectors and companies. This diversification helps in reducing risk and provides a balanced approach to investing.
5. SIP Option
Investors can invest in ELSS funds through a Systematic Investment Plan (SIP), which allows for regular investments. SIPs make investing affordable and help in averaging out the purchase cost over time, reducing the impact of market volatility. You can check your return through SIP Calculator.
How to Invest in ELSS?
Investing in ELSS is easy and can be done through various platforms, including mutual fund websites and banking apps. Here’s a step-by-step guide:
-
Assess Financial Goals: Determine your financial goals, risk tolerance, and investment horizon before choosing an ELSS fund.
-
Select an ELSS Fund: Research and compare different ELSS funds based on their past performance, expense ratio, and fund manager’s track record.
-
Choose Investment Mode: Decide whether to invest a lump sum or through SIPs. SIPs are recommended for those looking for disciplined and regular investments.
-
Complete KYC: Ensure you have completed the KYC process, mandatory for investing in mutual funds in India.
-
Start Investing: Use your preferred platform to invest in the chosen ELSS fund. For SIPs, set up an automatic debit facility from your bank account for the specified amount and frequency.
Conclusion
Mutual funds are increasingly becoming popular among investors due to numerous factors surrounding them. A notable example involves seeking the most appropriate mutual fund based on an individual’s preference for tax optimisation alongside high returns associated with stock markets.
ELSS mutual funds present themselves as the perfect solution since they offer the much-needed tax benefit under Section 80C while allowing the capital to grow. Prospective clients must understand what this type of fund entails to make informed decisions, leading them to achieve their investment objectives and safeguard their tomorrow.