What are Equity Linked Savings Scheme (ELSS) ?

01 Jul 2018

Are you looking to reduce your tax liability? Among the various instruments available, Equity Linked Savings Scheme (ELSS) under Section 80C is one of the most preferred investment options. An individual can save up to Rs. 46,350/- if falling under the 30% tax bracket and Rs. 30,900/- if falling under the 20% tax bracket.

Before we delve into the advantages of opting for ELSS, let us understand the meaning of it. 

What is ELSS?

Equity Linked Saving Schemes popularly known as ELSS, are open-ended & diversified equity schemes offer by Mutual Funds in India. They not only help you save tax under Section 80C but also give an opportunity to grow your money. 

Under this scheme, most of the fund corpus is invested in equities or equity-related products. 

An individual can invest in ELSS either a lumpsum or opt for the SIP  (Systematic Investment Plan) option. 

ELSS have a lock-in period of 3 years. It has the shortest lock-in period compared to other investments under section 80C. 

ADVANTAGES OF ELSS:

1)    LOCK IN PERIOD:The lock-in period for ELSS is 3 years compared to other investments under Section 80C. 

2)    TAX SAVING BENEFIT:Investments in ELSS qualifies for a tax deduction under Section 80C of the Income Tax Act. It also provides the investor additional benefits in terms of capital appreciation. 

3)    EQUITY LINKED SCHEME:Since ELSS is an equity linked scheme, the earning potential is high. 

4)   NO MINIMUM AND MAXIMUM LIMIT: Just like the regular mutual funds, Investors can invest an amount as low as Rs. 500/-.  There is no maximum limit of investing in ELSS. However, investment of up to Rs. 1,50,000/- will only be considered for deductions under Section 80C.

5)   DIVIDENT & GROWTH OPTION: ELSS provided 2 options for investment i.e. Dividend & growth. In the dividend option, a regular dividend can be earned during the 3 year lock-in period. While in the growth option, the investor can get a lumpsum amount after the expiry of the lock-in period.   

DISADVANTAGES OF ELSS:

1)   RISK FACTOR: Relatively higher risk is the only drawback of ELSS.Since ELSS is an equity market linked product, its returns are directly proportional to the performance of the market. Hence, like regular Mutual Funds, ELSS is also subject to market risks. However, these would mainly quality as short terms risks as investments for a longer period of 3 to 5 years, reduces the risk considerably. Hence, the best way to approach ELSS is through SIP’s. 

CONCLUSION:

ELSS is the best investment tool available for reducing tax liability. It is a smart way to use your savings not only for tax exemption but also financial growth. Investments done correctly under the guidance of professionals, would help build a strong investment portfolio by including ELSS Mutual Funds in the same

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