Mutual funds like equity schemes predominantly invest in equity and equity related instruments for income generation.Mutual funds invest across various money market instruments and asset classes. These are professionally managed funds that offer active risk management. There are some conservative tax saving schemes that offer tax exemption, but they cannot offer returns like ELSS. In the recent past, ELSS has offered far better capital appreciation than traditional tax saving instruments. It has a low lock in period, invests in stocks of large and select mid cap companies and also comes with a tax benefit.
Equity Linked Savings Scheme (ELSS) is an open ended tax saving mutual fund scheme that comes with a three year lock in and tax benefit. ELSS is the only mutual fund scheme where one can invest and seek tax exemption. ELSS comes with a three year lock-in which ensures that the invested amount earns some capital appreciation through equity markets.
Here’s an illustrative example to help investors understand how ELSS can help them save tax –
Harshal Mehta runs a restaurant and earns around Rs. 15 lakhs per annum. This lands him in the highest tax slab. Harshal learns about ELSS and decides to invest Rs. 1.5 lakhs in it. According to the Section 80C of the Indian Income Tax Act, 1961 investments of up to Rs. 1.5 lakhs made in an ELSS scheme are eligible for tax benefits. So, by investing Rs. 1.5 lakhs in ELSS Harshal managed to bring down his gross taxable income to Rs. 13.5 lakhs. Also, since ELSS is an equity mutual fund scheme, the 3 year lock in period might help Harshal accrue some interest on the investment amount.
Benefits of ELSS
ELSS is the only tax saving scheme that comes with a three year lock-in. This three year lock-in probably the smallest among other tax saving instruments that fall under Section 80C of the Indian Income Tax Act 1961.Being an equity oriented scheme, ELSS holds the potential to offer long term capital appreciation. Thus, not only will you save tax, investors can also target their life’s long term financial goals like buying a weekend home, going on a world tour, building a retirement corpus, planning you daughter’s surprise destination wedding or securing your child’s financial future.
Should you invest in ELSS via SIP or lumpsum?
There are multiple ways to invest in ELSS. One can either make a lump sum investment or they can start a monthly SIP. A lump sum investment is generally made towards the ELSS fund at the beginning of your investment journey. Generally, investors who have surplus cash that is sitting idle prefer making a lump sum investment. The benefit of making a lump sum investment towards ELSS scheme is that investors are allotted ELSS fund units in large quantities. This is why it is better to make a lump sum investment when the markets are low so that you can receive more units from the falling NAV.
A Systematic Investment Plan on the other hand makes investing in ELSS simple and easy. Through SIP you can invest small fixed amounts at regular intervals and continue investing till your investment objective is achieved. These days you can start a monthly SIP of an amount as low as Rs. 500 per month in a ELSS scheme of your choice. Long term investing in ELSS via SIP paves way for rupee cost averaging and power of compounding. You can even refer to SIP calculator to determine how much interest you will earn at the end of your ELSS fund investment journey.
Those who are new to investing or tax planning, please seek professional consultation before investing in ELSS fund.
