ELSS Tax Benefits & Investment Growth: All You Need To Know About This Mutual Fund

ELSS, or ‘Equity Linked Savings Scheme,’ denotes a mutual fund investment option accessible. ELSS mutual funds are intentionally crafted to afford investors a twofold advantage: the potential for capital appreciation through investments in the equity market, along with the opportunity for tax savings as per Section 80C of the Income Tax Act.

ELSS funds primarily invest in equity shares of companies across various sectors. This makes them different from traditional tax-saving investment options like Public Provident Fund (PPF) or National Savings Certificate (NSC), which are debt-oriented. The equity component is considered as the potential for higher returns over the long term, however, this exposes investors to higher market-related risks as well.

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Lock-In Period:

One of the distinctive features of ELSS funds is their mandatory lock-in period. The invested amount cannot be withdrawn for the first three years from the date of investment. However, you can switch your ELSS units from one scheme to another within the same fund house without any penalty.

Tax benefits:

You can claim a tax deduction of up to Rs. 1.5 lakh on the amount invested in ELSS funds in a financial year under Section 80C of the Income Tax Act, 1961. This deduction reduces your taxable income by the invested amount, resulting in lower tax liability. Remember, the deduction is available when you file ITR under the old tax regime.

Long-term capital gains (LTCG) tax exemption:

If you redeem your ELSS units after a lock-in period of 3 years, the capital gains arising from the sale of units will be taxed as long-term capital gains (LTCG). LTCG on ELSS funds up to Rs. 1 lakh is tax-free. Any LTCG above Rs 1 lakh will be taxed at 10%.

ELSS funds offer both dividend and growth options. In the dividend option, the fund distributes dividends periodically to investors. In the growth option, any profits made by the fund are reinvested, leading to potential compounding of returns.

ELSS funds can be invested through lump-sum investments or systematic investment plans (SIPs), which allow investors to contribute small amounts at regular intervals.

Once the mandatory lock-in period of three years is completed, investors have the option to redeem or continue holding the units. This offers more liquidity compared to longer-term tax-saving options.

Since ELSS funds primarily invest in equities, their returns are subject to market fluctuations. This also comes with a higher level of risk and volatility. It’s important to note that while ELSS funds offer potential tax benefits and higher returns, they also come with market-related risks.

Readers are advised to carefully consider their financial objectives, risk tolerance, and consult with a financial advisor before making any investment decisions. The information provided here is for educational and informational purposes only and should not be construed as financial advice. The decision to invest should be based on individual circumstances and understanding of the associated risks.

Mutual fund investments are subject to market risks, investors must read all scheme related documents carefully before investing.