What are Equity Linked Savings Schemes (ELSS) ?

21 Nov 2018

While tax planning may seem to be a difficult process, Mutual Funds offer you a simple way to get tax benefits, while aiming to make the most of the potential of the equity markets.

An Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that doesn't just help you save tax, but also gives you an opportunity to grow your money. It qualifies for tax exemptions under section (u/s) 80C of the Indian Income Tax Act.

How do deduction u/s 80C work ?

When you invest in certain schemes like ELSS, Public Provident Fund, certain Bank Fixed Deposits etc. you can claim up to Rs.1,50,000 as a deduction from your gross total income in a financial year under Section 80C of Income Tax Act, 1961. The Table below will help further explain the how this works

Particulars

Without Tax Saving Investments u/s 80C

With Tax Saving Investments u/s 80C

Gross Total Income

Rs.7,50,000

Rs.7,50,000

Exemption u/s 80C

Nil

Rs.1,50,000

Total Income

Rs.7,50,000

Rs.6,00,000

Tax on Total Income

Rs.75,000

Rs.45,000

Tax saved

Nil

Rs.30,000

 

Illustration of Tax exemption for an individual less than 60 years in receipt of salary income for the assessment year 2015-16. Along with the tax deductions, an ELSS offers you the opportunity to grow your money by investing in the equity market. Long-term capital gains from these funds are tax free in your hands and the lock-in period is only 3 years. Furthermore,

you can also opt for a Dividend Payout option, thereby realizing some potential gain during the lock-in period, and also choose to invest through a Systematic Investment Plan and bring discipline to your tax planning.

Why should you invest in Equity Linked Savings Schemes ?

Along with the tax deductions, an ELSS offers you the following benefits:

  • An opportunity to grow your money by investing in the equity market.
  • Long-term capital gains from these funds are tax free in your hands.
  • The lock-in period is only 3 years.
  • You can also opt for a Dividend Payout option, thereby realizing some potential gain during the lock-in period.#
  • You can invest through a Systematic Investment Plan and bring discipline to your tax planning

# However, it must be noted that any dividend payment will be from the NAV of the Scheme and therefore the NAV of the scheme will fall to the extent of dividend payment. Also dividend payment is subject to availability of distributable surplus and approval from Trustees.

Features of ELSS and other Tax Saving instruments u/s 80C of Income Tax Act, 1961 ?

Particulars

PPF

NSC

ELSS

Tenure

15 years

6 years

3 years

Returns

8.70 % *
(Compounded Annually)

8.50 to 8.80 % *
(Compounded half-yearly)

Returns / Dividends are Market
linked and not assured

Minimum Investment

Rs.500

Rs.100

Rs.500

Maximum Investment

Rs.150,000

No limit^

No limit^

Amount eligible for deduction u/s 80C

Rs.150,000

Rs.150,000

Rs.150,000

Taxation for interest

Tax free

Taxable

Dividends and capital gain tax free

Safety/ Risk

Highest Safety

Highest Safety

High Risk

Lock-in Period

15 Years - Partial Withdrawal after 6 years is permitted

6 Years

3 years

*Source: http://finmin.nic.in - All rates shown above have been compounded wherever applicable. *There is no upper limit on investments. However, investments of only upto Rs.150,000 per year are allowed to be claimed as deductions under Section 80C of Income Tax Act, 1961.

Points to remember while choosing an appropriate ELSS
You must always remember to do thorough research when you invest in an ELSS fund. You must look at the long term performance of the fund before putting your money in it. Also remember to look at the fund details like the fund manager’s investment approach, portfolio of the fund, the expense ratio of the fund and how volatile the fund has been in the past.

Source - ICICI Mutual Fund - https://www.icicipruamc.com/InvestCorrectly/Basics-of-Mutual-Funds/Save-tax-with-ELSS.aspx  

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