Best Tax Saving Mutual Funds- What is ELSS and How to Invest in it?

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Equirus Wealth

24 Feb 2023 5 min read

Mutual Fund#Mutual Funds#Investment

Section 80C under the Old Tax Regime of the Income Tax Act, 1961, is one of the most favored sections for taxpayers, especially salaried persons. Most salaried people start using this section from receiving their first salary.

Equity Linked savings Scheme (ELSS) is one instrument that can be used to reduce the tax burden under the Old Tax Regime of the Income Tax Act of 1961. In fact, you can invest a maximum amount of Rs. 1.5 lakhs in ELSS and claim a deduction of the same in an assessment year.

Let us familiarise ourselves with the concept of ELSS and how you can invest in it.

What is ELSS?

ELSS, or Equity Linked Savings Scheme, is a one-of-its-kind equity-oriented mutual fund that allows an income tax deduction of upto Rs 1.5 lakhs per annum under section 80C of the ITA from the total taxable income of an individual. The fund has an amount of approximately 65% parked in equity shares that are listed on the stock exchange. Part of the investment is also in fixed-income papers to provide income into the scheme. The lock-in tenure of the ELSS scheme is only 3 years, which is one of the least among all other 80C investments.

What are ELSS funds?

ELSS funds have some characteristics which we will discuss here.

  1. ELSS are equity-oriented mutual funds.
  2. A deduction of Rs. 1,50,000 is available under Section 80C for the ELSS funds.
  3. ELSS funds have a lock-in tenure of 3 years for both lump-sum and SIP. Thus, each SIP installment has a lock-in tenure of 3 years from the exact date of investment. There are only options for exiting the investment after the completion of the lock-in tenure.
  4. The amount to be invested in ELSS has no upper limit. The minimum amount to be invested varies across different fund houses.
  5. ELSS has the benefit of income tax deductions as well as wealth creation over time.
  6. Exposure to equities and fixed-income instruments balances the risk profile of the fund.

How to invest in ELSS?

The investment towards ELSS tax saving funds can be made either in lumpsum or through systematic investment plans.

As an investor, you can choose to invest in ELSS offline by submitting a cheque at the ELSS fund office or the registrar's office.

There is a simpler way to invest in ELSS funds, and that is through the online application for the funds.

  1. An investor should make sure that the e-KYC is completed and updated.
  2. The platform or the aggregator site is visited to choose among all the options.
  3. Select the scheme that best suits your interest and income circumstances.
  4. You can complete the registration process through the authorized channel and obtain a folio number.
  5. You receive a pre-filled mandate and FATCA details from NSE on your registered email.

Factors to keep in mind at the time of investing in ELSS:

Here are some factors that you can consider at the time of investing in an ELSS scheme:

  1. Investment period - The investment horizon for ELSS tax-saving mutual funds is longer and needs a period of at least 5 years to obtain the maximum return. The equity exposure to this fund requires a longer horizon to fetch the best returns.
  2. Returns - Since the fund is equity-oriented, the returns depend on the fund's performance in the market. A horizon of 5 years or more can provide you with returns that are observed to be more than any
    tax-saving instrument.
  3. Lock-in period - The lock-in period for ELSS is 3 years, and there is no provision to redeem the investment amount in these 3 years. Before you plan to invest in ELSS, you should give thorough thought to the above fact.
Fact: When investing in ELSS through SIP(Systematic Investment Plan), it's important to note that each installment is considered a separate investment and is sunject to a lock-in period of three years.

How to select the right ELSS fund?

The taxability of ELSS funds can be one factor determining the fund's selection.

  • Long-term capital gains are applicable to ELSS funds. The proceeds in excess of Rs. 1 lakh attract a tax of 10%.
  • Dividends that are released in excess of Rs. 5,000 are subject to tax deduction at source at the rate of 10%.
  • The annual returns of funds and their past performance can be two significant factors affecting ELSS funds' selection.
Fact: There is no minimum investment required for ELSS, which means investors are free to invest in any amount they wish in this scheme!

Conclusion

The best tax-saving ELSS funds are a great instrument for tax saving and long-term investment. The primary objective is to invest in equity and fixed instruments to balance the risk and yet get the maximum returns from the investment.

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