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How ELSS funds can help you save taxes and grow wealth

A large Indian population uses SIP regularly to invest in mutual funds. This indicates that the benefits of mutual funds are reaching more investors owing to their flexibility and convenience. Especially the younger generation and beginners to investing who need to be made aware of investment concepts and need more time on their hands are choosing ELSS schemes for wealth accumulation.

 

ELSS is an equity-focused investment tool. It offers high returns in the lock term and comprises a three-year lock-in period. Even if the equity market doesn't perform well in those three years, you have the option to remain invested beyond three years or regain your investment.

 

Did you know? Apart from offering high returns, ELSS offers tax benefits as well.

Tax provisions applicable for ELSS
 

  • A Hindu Undivided Family (HUF) or an individual can claim a tax deduction for investments made toward ELSS. This provision falls under Section 80C of the Indian Income Tax Act 1961.

  •  

  • Deductions can be up to ₹ 1.50 lakh rupees every financial year, along with other eligible items. These include PF, school fees, Life Insurance Premiums, repayment of home loans, PPF, etc.

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  • ELSS has a short lock-in period, and the profits can be taxed during redemption. For taxation purposes, every STP and SIP instalment has to be treated as an individual and separate investment.

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  • Short-term capital gains taxes don't apply to ELSS. These taxes come into the picture only when units are redeemed within the span of one year of purchase. Hence, ELSS fund returns above ₹ 1 lakh per annum are taxed at 10% under Long term capital gains tax.

What are the tax benefits offered by ELSS?
 

 

  1. The Equity Linked Savings Scheme (ELSS) provides the following benefits in addition to the tax saving advantage every financial year.

     

    The nature of ELSS funds entails that there must be an allocation of eighty per cent or more of their assets into equity shares or equity-related investment instruments. This allocation makes the funds gain high-risk exposure since they are immediately and heavily affected by the volatile nature of the market.

     

    On the other side, significant market upswings can result in higher gains compared to other investment instruments.

     

    The earlier one starts investing in ELSS funds, the more prone their investments are to profitable returns. Since ELSS involves a diverse portfolio, they offer better gains to the investors. This helps investors reach their financial goals without having to worry about particular stocks or shares.

     

    Under Section 80C of the Indian Income Tax Act. 1961, all investment contributions made towards ELSS are subject to tax exemption. The tax exemption is up to ₹1.5 lakhs per financial year. This amount can be in a single ELSS fund or across multiple ELSS schemes.

     

  2. Now, let's compare the three-year lock-in period of ELSS with other popular tax-saving instruments:
     

    • Public Provident Funds entail a lock-in period of 15 years.

    • Fixed Deposits comprise of a lock-in period of 5 years.

    • National pension schemes have a lock-in period till the investor reaches the age of 60

    • The National Savings Certificate has a lock-in period of 5 years.

    This comparison indicates ELSS funds have the shortest lock-in period in this category.

  3.  

  4. Another beneficial aspect of investing in ELSS funds is the return on investment. Market performance could be more predictable. However, ELSS funds have a consistent history of outperforming comparative tax-saving investment funds that offer single-digit returns.

  5.  

  6. ELSS is a kind of mutual fund that allows you to invest starting as low as ₹500 per month via Systematic Investment Plans (SIP). This allows the investor to regularise their investments with flexibility. Investors can also choose to invest a lump sum amount. And ELSS funds can be managed online without the hassle of long queues or filling out paper forms.

  7.  

  8. ELSS is a tax-saving fund and helps with portfolio diversification. Variating shares and stocks in your portfolio will lower the risk. It will also decrease the investor's dependency on the performance of a specific company's shares.

Conclusion

ELSS funds are a beneficial combination of saving annual tax and wealth growth. These tax-saving funds have a taxation limit of ₹ 1.5 lakhs per annum, attracting salaried individuals and new investors to choose ELSS to consolidate tax savings. But it is important to remember tax saving is not your only financial goal. Hence, consider and compare risk factors before investing in ELSS funds.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

How much tax can ELSS save?

ELSS pertains to Section 80C of the Indian Income Tax Act of 1961. It can lead to tax savings of up to ₹ 1.5 lakhs per financial year.

What happens to ELSS funds after the lock-in period of three years?

After the lock-in period of three years is over, the ELSS investments become redeemable. Investors can choose to hold or withdraw the funds completely or partially.

What are the ways to invest in ELSS funds?

  1. The growth option: As an investor, you will get the profits only at the time of redemption in the growth option. Since you will not get benefits as dividends, it will help increase the total NAV, multiplying the profits. However, the returns are subject to market risk.

  2. The dividend option: An investor gets benefits from time to time in the dividend option in the form of dividends. These dividends are subject to tax as per the tax slab.

  3. The dividend reinvestment option: Dividend reinvestments are an option for ELSS wherein the investor reinvests the dividends received. These are added to the NAV. This option works well when the market witnesses a rise and is likely to continue in an upswing.