Why you Should Choose ELSS Funds to Save Taxes?

Saving taxes is a crucial aspect of wealth creation. The Indian Government provides several tax-saving options to encourage individuals to invest in such instruments that can help them save taxes. One such option is Tax Saving Mutual Funds, popularly known as Equity Linked Saving Schemes (ELSS).

ELSS Mutual funds are one of the most preferred tax-saving investments options available in the market. It is because of the high returns and tax-saving benefits associated with it.

ELSS funds are mutual funds that invest primarily in equity and equity-related securities. As per the guidelines of the Securities and Exchange Board of India (SEBI), ELSS funds have to invest a minimum of 80% of their assets in equity and equity-related securities.

Hybrid mutual funds that invest in both equity and debt may not offer the same benefits as ELSS funds.

Hybrid mutual funds are taxed according to the asset holdings, which means the holding period determines whether it is a short-term or long-term capital gain, and the tax rate is calculated accordingly.

On the other hand, ELSS funds are considered as equity mutual funds and are taxed differently. They offer a tax saving up to Rs. 1.5 lakh under section 80C of the Income Tax Act, 1961.

Tax benefits of the Equity Linked Saving Schemes (ELSS)

Tax Saving Mutual Funds or Equity Linked Saving Schemes (ELSS) have become increasingly popular as a tax-saving investment option. The primary reason behind this is ELSS funds’ ability to offer double benefits to investors – high returns and tax-saving benefits.

These funds have a lock-in period of three years, and the amount invested can be claimed as a tax deduction under section 80C of the Income Tax Act, 1961.

This means, if you invest Rs.1.5 lakh in ELSS funds, you can claim a tax deduction of Rs. 1.5 lakh from your taxable income.

This would result in saving up to Rs. 46,800, provided you fall under the highest tax bracket of 31.2%.

Tax benefits on the capital gains of Equity Linked Saving Schemes

Moreover, ELSS funds offer long-term capital gains tax (LTCG) of up to Rs. 1 lakh per financial year. If you redeem your investment in ELSS funds after the completion of the three-year lock-in period, the gains earned up to Rs.1 lakh are exempt from tax. Gains above that are taxed at 10%.

One of the primary benefits of investing in ELSS funds is that they provide a higher return on investment (ROI) when compared to other tax-saving instruments such as Public Provident Fund (PPF) or National Savings Certificate (NSC).

The returns vary from 12-15%, depending on market conditions. These funds have the potential to create wealth over the long-term, and the disciplined approach of investing in them can help individuals achieve their long-term financial goals.

How you can invest in Equity Linked Saving Schemes

Unlike other tax-saving instruments, ELSS funds offer flexibility to investors. An individual can invest in ELSS funds through lump sum investments or through Systematic Investment Plan (SIP).

SIP is a fixed investment amount made at regular intervals over a specific period. It offers an advantage of investing a fixed amount regularly, which is favourable in volatile market situations.

Here is how you can invest in Equity Linked Savings Schemes (ELSS):

1. Research and understand

  • Begin by researching different ELSS funds available in the market. Understand their investment philosophy, historical performance, and risk factors.
  • Consider your financial goals, risk tolerance, and investment horizon. ELSS is a long-term investment, so choose wisely.

2. Choose a fund

  • Select an ELSS fund that aligns with your investment objectives. Look for consistent performance, low expense ratios, and experienced fund managers.
  • You can invest directly through the fund house’s website or through a reliable mutual fund platform.

3. KYC compliance

  • Ensure you have completed your Know Your Customer (KYC) process. This involves submitting identity proof, address proof, and other necessary documents.
  • KYC can be done online or through the fund house or a registrar and transfer agent (RTA).

4. Investment amount

  • Decide how much you want to invest. The minimum investment amount varies across funds but is generally affordable.
  • Remember that investments up to Rs. 1.5 lakh in ELSS are eligible for tax deduction under Section 80C.

5. Investment mode

  • You can invest in ELSS through Systematic Investment Plan (SIP) or lump sum.
  • SIP allows you to invest a fixed amount regularly (monthly or quarterly), which helps in rupee cost averaging.

6. Online or offline

  • Invest online through the fund house’s website or a reliable mutual fund platform. It is convenient and efficient.
  • Alternatively, visit the nearest branch of the fund house or a distributor to invest offline.

7. Submit application form

  • If investing offline, fill out the ELSS application form. Attach necessary documents and a cheque/DD for the investment amount.
  • For online investments, follow the instructions on the website or app.

8. Monitor your investment

  • Keep track of your ELSS investment. Review its performance periodically.
  • Remember the 3-year lock-in period. You cannot redeem your investment before this period.

9. Tax benefits

  • Claim tax benefits under Section 80C for the invested amount.
  • Consult a tax advisor to maximise your tax savings.

10. Stay invested

  • ELSS funds have the potential to deliver good returns over the long term. Stay invested even after the lock-in period ends

In conclusion, Tax Saving Mutual Funds or Equity Linked Saving Schemes (ELSS) are an excellent avenue to invest in the Indian equity market while saving taxes.

The long-term investment horizon combined with the potential to earn higher returns makes it a preferred investment option for investors.

ELSS funds offer an excellent opportunity for investors who want to create wealth in the long term and save taxes in the short term. They offer discipline, flexibility, and tax-saving benefits, making it an ideal investment option for investors.

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