Are you in need of tax-saving investment options? Look no further than ELSS! In this article, we will dive deep into the world of this investment tool and decipher its delightful benefits.
ELSS stands for Equity Linked Savings Scheme. ELSS is a popular choice among investors because of its low lock-in period, tax benefits and potential capital appreciation.
But what exactly is ELSS? How does it work? And why should you consider it as part of your investment portfolio? These are all questions we will explore as we uncover the full form of ELSS. From understanding the different types of ELSS funds to determining the best time to invest, we will equip you with the knowledge you need to make informed investment decisions. So, if you’re ready to decode the world of ELSS and unlock its potential, let’s begin this enlightening journey together!
Table of Contents
Understanding the full form of ELSS
Not all Equity Mutual funds can save your taxes under section 80C. But only a special category called Equity Linked Savings Scheme/ ELSS can.
The full Form of ELSS is Equity Linked Saving scheme. These ELSS mutual funds have a locking time of 3 years only, which is the least lock-in time among all tax saving schemes.
Benefits of investing in ELSS
- Tax Saving U/S 80C – You can get tax deduction U/S 80C for 1.5 lac in a financial year.
- Short Lock in Time- ELSS MF have lock-in period of 3 years only. An investor can withdraw money after completion of 3 years.
- Long-term wealth creation – ELSS funds allow the option to stay invested longer than 3 years. This way one can get much better returns. Since these funds are invested in equities, considerable wealth can be generated over time.
- Promotes Saving Habit– Since you can invest through monthly instalments aka SIP, which bring in good saving habits.
ELSS vs other tax saving options
Other tax Saving options have greater lock in time and low returns as compared to ELSS mutual funds.
| Tax Saving Investment | Risk | Return | Lock in time | When you can withdraw |
| Life Insurance Policy ( Traditional ) | Low | 5%-7% | Depends on policy durations | on maturity of policy or as per policy wordings |
| Life Insurance Policy ( ULIP ) | High | 6%-12% | Depends on policy duration | on maturity of policy or as per policy wordings |
| Post Office National Saving Certificate ( one time deposit scheme) | Low | 7%-8% | 5 Years | after completion of 5 years |
| Post Office 5 year Time Deposit ( ( one time deposit scheme) | Low | 7%-8% | 5 years | after completion of 5 years |
| Public Provident Fund ( regular deposit for 15 years) | Low | 7%-8% | 15 Years | after completion of 15 years |
| Senior Citizen Saving Scheme ( one time deposit scheme) | Low | 7%-9% | 5 Years | after completion of 5 years |
| Sukanya Samriddhi Yojana ( regular deposit ) | Low | 7%-9% | 21 years | after completion of 18/21 years( child age) |
| National Pension Scheme | Moderate to High | 7%-12% | till Retirement | At retirement |
ELSS tax benefits and considerations
Why invest? If you invest in ELSS mutual funds you get tax exemption (of the invested amount )up to the limit of Rs 1.5 lakh in a financial year.
On withdrawal, after completion of three or more years, the gains are considered long-term capital gains. The LTCG gains are taxed at 10% if the profit is above 1 lakh.
Suppose Bestii Singh invested Rs 1.5 lac in Axis Long Term Equity Fund in Jan 2020. He redeemed money in Feb 2023. Let’s assume he sold MF in Rs 3 lac. His profit is 1.5 lac. Now from this money 1 lac is exempt and he has to pay 10% of Rs 50000 as taxes.
How to invest in ELSS MF?
The procedure to invest in ELSS MF is the same as that of a mutual fund. You can either invest a lump sum amount or as monthly/quarterly/half yearly/yearly regular payments.
You can also invest in the same fund as and when you like. Even investing a lump sum amount and SIP in the same or different fund is also possible. Read more : SIP Or Mutual Fund – What Is The Difference & Example
ELSS investment strategies
The best way to invest in ELSS mutual funds is SIP.
Investing via SIP or STP offers value cost averaging and leverages the market volatility.
Common misconceptions about ELSS
Myth 1: ELSS investments are automatically redeemed after the lock-in period.
You need to submit a withdrawal request to withdraw money from ELSS. Although the locking time is only 3 years, but ELSS has an option to stay invested for years altogether.
.Myth 2: You can only invest up to Rs.1.5 lac.
ELSS Mutual fund tax exemption is up to an amount 1.5 lakh under section 80C but you can deposit any amount of your choice.
Myth 3: Only a lump sum investment in ELSS qualifies for tax benefits
Whether you invest a lump sum amount or invest via SIP you get tax deduction both ways.
Myth 4: ELSS investments are ideal for the short-term.
You are eligible to withdraw money after completion of 3 years but to get good returns from equity linked saving schemes one need to stay invested for at least 5 years.
Myth 5: you get tax deduction from all equity mutual funds.
All equity Mutual funds do not provide tax saving options this is a special category of mutual funds called as equity-linked saving schemes ELSS mutual funds only these Mutual funds provide tax benefits under section 80c
Conclusion: Why ELSS is a smart investment option
Tax-saving mutual funds can be a smart investment option if invested for the long term. These funds usually use a diversified approach for investing money, which means they invest across market caps i.e. large, mid & small caps. Thus, comparatively, they are less riskier than theme-based funds, and small-cap funds.
ELSS MF provides lots of flexibility, which other products do not. I mean, if at all, you do not want to pay or redeem after a certain time, you can. Whereas, in case of an insurance policy lapse, you have to bear huge losses.
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