Equity Linked Savings Scheme or ELSS or tax saving mutual funds as they are famously known as are special funds which help you save tax under the section 80C of IT Act. You can save up to Rs. 1.5 lakhs under section 80C.
Why should you invest in ELSS?
You must be wondering why ELSS is so popular. Well, here are the reasons.
Lock-in Period
The lock-in period for ELSS is three years. It means that you will have to stay invested for a period of at least three years to get an exemption from taxes on returns. This automatically helps inculcate the habit of staying invested for a longer period.
Tax benefit
One of the main reasons to invest in ELSS schemes is to save tax. ELSS investments qualify for tax deduction under section 80C of the Income Tax Act of 1961. Your returns from ELSS become tax-free. You can invest in ELSS and get an exemption of Rs.1,50,000 from your taxable income.
Long-term value growth
Despite having a lock-in period of three years, you can continue to stay invested in ELSS and allow continued growth of your fund. There is no denying that ELSS schemes are subject to market risks. However, since your money is invested in equity, you stand a fair chance of getting higher returns with tax exemption.
Inculcates the habit of saving
ELSS allows you to invest as low as Rs.500 and turn your savings into investments. This helps you invest continuously. Also, as the lock-in period is three years, you can start SIP. This will help you get returns for the SIP every month after three years. Besides, the returns are also exempted from taxes.
Allows you to invest in equity
While savings can give you about 8% returns, investing in ELSS can help you get higher returns when the market is high.
Low minimum limit
You can invest as low as Rs.500 and so it is a great option for people with low income and beginners.
Disadvantages of ELSS
Although there are several advantages of ELSS, there are a few disadvantages that you must consider before investing.
Requires a lot of documentation
As ELSS is equity-based, the returns depend completely on the market performance
Premature withdrawal is not allowed
NRIs are not allowed to invest in most of the mutual fund schemes
ELSS includes higher risks compared to NSC and PPF investment
Features of ELSS
ELSS schemes are open-ended mutual fund saving scheme which provides you with a tax benefit of up to Rs.1.5 lakhs.
Has a lock-in period of 3 years
ELSS provides you two investment options- dividend or growth.
In dividend, you will receive a fixed installment during the lock-in period while a lumpsum amount is paid to you after 3 years under growth option.
You can invest up to Rs.1.5 lakhs every year.
The maximum amount of money is invested in equity-oriented instruments.
Through SIP, you can make a disciplined investment and gain long-term benefits.
The return on investment completely depends on market conditions.
Steps to invest in ELSS
Step 1: Select a tax-saving scheme according to your requirements.
Step 2: Choose an option between a regular mutual fund and tax saving mutual fund scheme. Both the plans have a different NAV.
Step 3: Open a bank account.
Step 4: Pick your intermediary or mutual fund distributor. Ensure that you pick an ELSS scheme that benefits you and not your distributor.
Where to open an ELSS account?
You can choose any nationalized or private bank. You can inform the banker about your investment plan. You can seek help from a professional financial advisor who will suggest plans according to your requirements.
Top five ELSS schemes worth considering are:
Motilal Oswal Long Term Equity Fund
Aditya Birla Sun Life Tax Relief 96
L&T Tax Advantage
Invesco India Tax Plan
Axis Long Term Equity Fund
It is recommended that you select the company and ELSS scheme carefully as in case the company shuts down, you will not receive even your principal amount. Research about the past performance of the funds as it will help determine its future performance. Also, after you start your investment make sure that you consult with your distributor and understand the progress of your investment regularly.