By investing in Equity Linked Savings Schemes, also known as ELSS Funds, investors can get tax deduction of up to Rs 150,000 from their taxable income under Section 80C of Income Tax Act 1961. ELSS or tax saver mutual funds are equity mutual fund schemes which invest in a diversified portfolio of stocks with the objective of generating capital appreciation over a sufficiently long investment horizon. Though ELSS investments are subject to market risks, they are among the best tax saving investments under Section 80C because historical data shows that equity has been the best performing asset class in the long term.
Please see performance of top 10 ELSS funds
Equity Linked Savings Schemes or ELSS funds have a lock-in period of only 3 years; investors cannot redeem ELSS mutual funds units till 3 years from the date of investment. Investors can invest in ELSS mutual funds in lump sum or through Systematic Investment Plans (SIP). By investing in ELSS through SIP, investors should note that, each SIP instalment is locked in for three years.
Please see the SIP returns of ELSS funds from here
Equity Linked Savings Schemes or ELSS mutual fund Investors can choose between Growth and Dividend payout options based on the investment objective of the respective investors. In Growth Option, the profits generated by the scheme remain invested in the scheme and compounds over the investment period to give higher returns to investors.
In Dividend Option, the profits made by the ELSS scheme may be distributed to the investors in the form of dividends. However, the dividends may or may not be declared and is totally the discretion of the fund manager of the scheme. Unlike other mutual fund schemes, dividend re-investment option is not available in ELSS mutual funds.
By saving the maximum amount (Rs 150,000) in Equity Linked Savings Schemes or ELSS funds under Section 80C of The Income Tax Act 1961, investors can save up to Rs 46,350 (applicable to investors in 30% tax bracket) in taxes every tax year. Investors should also note that the overall limit of Rs 150,000 under Section 80C also includes investments in bank tax savings fixed deposits, PPF, NSC and premium paid for life insurance etc. and is not exclusive to ELSS mutual funds.
Please read – All you wanted to about Income Tax slabs 2017-18
Apart from tax savings, ELSS mutual fund investments are suitable for a variety of long term financial goals like retirement planning, children’s education and their marriage and wealth creation etc.
Equity Linked Savings Schemes or ELSS mutual funds are open ended schemes but they have a lock-in period of 3 years due to the tax rebate benefit. However, compared to other Section 80C investment options, mutual fund ELSS schemes offers the maximum liquidity to investors as most other Section 80C investment options have a minimum lock-in period of at least 5 years or more (in case of PPF It is 15 years).
Equity Linked Savings Schemes or ELSS is also the most tax friendly investment option among the eligible Section 80C investment options. This is because ELSS Mutual Funds comes under E-E-T (Exempt-exempt-Exempt) category. This means, there is no taxation during the time of investment, there is no tax on the interim profits like dividends or partial withdrawal after 3 years and again no tax on the final redemption amount as that is tax free under long term capital gains taxation benefit applicable to equity mutual funds/ equities.
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