The Buyt Desk
Investing without a well-thought financial goal forfeits the very purpose of investment. More than often we have seen people investing a big lump sum amount at the time of filing their income tax return just to save their tax. If you do have a big amount to invest and you are eyeing tax benefit then Equity Linked Saving Scheme (ELSS) would be an ideal investment product. ELSS is a type of mutual fund that invests in equity markets.
Features of ELSS
-
ELSS is a tax-saving instrument that provides high returns. It enjoys a tax deduction of up to Rs.1.5 lakhs under Section 80C of the Income Tax Act.
-
Your money is locked for 3-years in ELSS. If you intend to invest through monthly SIP contribution then do keep in mind that each contribution will have a lock-in cycle of 3 years. A contribution made in April 2021 will be locked in till April 2024. So every Sip will be maturing after 3 years. So overall the lock-in extends for around 5-6 years. But if you invest lump sum then the lock-in cycle would be shorter.
-
There is no investment limit in the case of ELSS. Moreover, the minimum investment amount can be as low as Rs.500.
-
The returns from ELSS are not taxed according to your income tax slab. Long-term Capital Gains Tax (LTCG) of 10% applies to the returns of ELSS. The returns up to Rs.1 lakh in a financial year are exempt from taxation.
-
As with any type of mutual fund, an expert fund manager invests the money for you. Investment can be a lump sum amount or regular payment through a Systematic Investment Plan (SIP). ELSS provides two investment options: growth and dividend. The dividend option gives you a payout at regular intervals. While the fund manager re-invests the returns in the case of the growth option.
-
The fund manager invests money in diverse shares ranging from Small-Cap companies to Large-Cap companies. Diversification of the portfolio also includes investing in shares of companies from different sectors such as automobile, pharmaceutical, cement, etc.
Advantages of ELSS
-
ELSS is a great tax-saving instrument. It is eligible under Section 80C of the IT Act. The returns up to Rs.1lakh in a financial year are exempt from taxation. Further, only a 10% LTCG tax applies instead of income tax on the returns.
-
Among all the tax-saving instruments, ELSS has the lowest lock-in period.
-
In addition to saving tax, ELSS has the potential to provide high returns with a high investment horizon because it is linked to the equity market.
-
It offers portfolio diversification and is managed by an expert professional.
Disadvantages of ELSS
-
As ELSS is an equity fund, the returns vary with market fluctuation. The risk is averaged out by staying invested for more than 5 years. There are tax-saving instruments that give guaranteed returns, for example, tax-saving FD.
-
The returns from ELSS are not tax-free. A tax-saving instrument like PPF provides tax-free income.
-
There is no way to prevent or reduce exposure to the equity market in ELSS. A tax-saving instrument like ULIP offers flexibility to switch the investment between equity or debt funds.
-
Understand the lock-in period of an ELSS before investing in it. The policy of first in first out applies to the SIP contribution. Evey SIP will follow a three-year cycle of lock-in.
