What is ELSS?
Equity Linked Savings Scheme, in simple terms, is a form of savings or rather an investment, that will give you good returns in a relatively short period of time.
To explain ELSS further, it is a form of a mutual fund, where the majority of the money put into the saving scheme (65%), is invested in equity stocks. Equities, in general, are known to be a better investment source than other forms of investments, because they are inflation-linked investments.
Inflation-linked investments basically mean that the investor has reduced risk during inflation, the price of commodities such as gold, equities, etc. only rise during inflation, and hence it will fetch more returns to the investor, unlike other forms of investments such as Fixed deposits.
Features of ELSS:
- Short lock-in period: Lock-in period refers to the period where you cannot withdraw the money invested in a particular fund. There are other tax-saving investments available in the market, like Public Provident Fund (PPF), National Pension System (NPS) or Fixed Deposits (FD) and so on, however, all these investment schemes have a lock-in period of more than 5 years. ELSS gives you a tax benefit, with just a minimum lock-in period of 3 years.
- Tax Saving: ELSS is a kind of mutual fund which provides a deduction on amounts up to Rs.1,50,000, under Section 80C.
- Choice in the format: You can choose to invest in either a dividend or growth option depending upon the requirement of money. In growth option, money is re-invested and keeps growing till the time you redeem it, whereas dividend is paid out in the Dividend Payout option. However, the dividend paid by ELSS funds is also taxable at 11.65%.
Types of ELSS:
There are two types of ELSS:
- Growth Fund: A long-term form of ELSS where the main goal is capital appreciation. When the market reaches its peak, the gains are very high, but the investor does not receive any dividends. However, the full value of the fund is realized at the time of redemption.
- Dividend Payout: This has two sub-categories-
- Dividend Payout: Under the Dividend Payout option, you will receive tax-free dividends.
- Dividend Reinvestment: In the case of Dividend Reinvestment, your dividends will be reinvested as a new investment, instead of realizing it like cash at the end of the investment period.
Why invest in ELSS?
Section 80C of the Income Tax Act of 1961, determines how much of our earnings can be taxed.
- ELSS mutual funds are the only class of mutual funds eligible for tax deductions.
- One can save taxes up to Rs. 46,800*/- while investing up to Rs.1,50,000 through the deductions you can avail. You can invest more than Rs.1,50,000, however, in this case, you will not qualify to avail the tax benefits as per the provisions of Section 80C.
- Moreover, Long Term Capital Gains is exempt up to Rs. 1, 00,000. Above which it is taxed at 10%. Thus, despite the new regime of tax on Long-Term capital Gains, in the opinion of experts, ELSS still holds the position of the best form of tax saving mutual fund, with the highest post-tax returns. These equity-linked instruments are thus the best choice of investment, for both short (minimum of 3 years) and long term.
How to invest in ELSS?
Investing in ELSS is fairly simple. It can be either done by you directly or through an intermediary (in person or online), or even through a bank.
- Investing through intermediaries: You need to hunt for a trustworthy agent who will guide you through the process. They could be working with a company, wherein they get paid by their company for bringing in a new client, instead of giving a share of your gains. Or, they could be individuals who you may pay directly for their guidance, often called mutual fund distributors. After picking your intermediary, they will help you open an account and will register you to the AMC ( Asset Management Company) if they belong to one, and you will have to go through the KYC ( Know Your Customer) process to proceed. You can invest as a lump sum or SIP (Systematic Investment Plan). The agent will then take over the funds and invest while keeping you posted on the gains and risks.
- Investing online: Several websites now offer you the option of investing online. They often have automated tools that enable you to determine the best scheme for you, as per your requirements. However, stay wary of frauds, and do your research before you invest through any site.
- Investing by yourself: If you believe you have the time to do the task yourself, you can directly contact the companies or banks with which you may want to invest. The bank also often offers you guidance on your investment options. It is, however, ideal to have some form of guidance when you are an amateur investor to make the most out of your investment.
Here are a few questions that may arise in your minds after a basic understanding of ELSS.
1. What is the minimum lock-in period for ELSS?
The minimum lock-in period is three years for the Equity-Linked Savings Scheme, which is the lowest lock-in period for any form of investment in Section 80C.
2. How much can you invest in ELSS?
Equity-Linked Savings Scheme allows you to begin with just Rs.500, and then multiples of Rs.500. There is no maximum limit in ELSS.
3. What happens if I invest more than 1.5L IN ELSS?
By investing more than 1.5L per annum, your returns become taxable. It is also important to remember, that you will not be able to touch the funds you are investing for a minimum period of three years, before realizing them.
4. Is there no tax to be paid at all if I invest only 1.5L per annum?
In ELSS, you still have to pay tax on the amount you receive after the lock-in period of 3 years, under Long-Term Capital Gains (LTCG), if it exceeds Rs.1,00,000. However, the post-tax amount received will still be higher than other forms of mutual fund investments, making this a great mode of investment.
5. Why invest in mutual funds like ELSS?
By investing in ELSS, you can reduce the amount invested from your income, thereby reducing your income tax. However, it is more beneficial to people who are willing to stay in the game for longer periods, as the gains are usually greater.
6. What is lump sum and SIP?
Lump-sum is a form of ELSS where you invest your entire money in one go, for example, if you have Rs.10000, you may invest it in one go to gain returns.
Whereas, Systematic Investment Plan (SIP) is a method where mutual funds offer you the option of periodically investing smaller amounts instead of a lump sum. They are invested on a weekly, monthly or quarterly basis.
7. I am an NRI, can I invest in mutual funds?
No, unfortunately, you cannot make mutual fund investments if you are a Non-resident Indian (NRI), regardless of whether you are from the U.S or Canada.