How does ELSS help in saving taxes? Should you invest in them?

Equity Linked Savings Scheme (ELSS) funds are tax-saving investment options that offer higher returns. ELSS mutual funds are a type of mutual fund that predominantly invest in equity-related instruments and come with the added advantage of tax benefits. Read on to know what makes ELSS funds popularly known as “tax-saver mutual funds” a preferred options and whether you should consider investing in them.

What are ELSS funds or tax-saving mutual funds?

Equity Linked Savings Scheme (ELSS) funds are a category of mutual funds that primarily invest in equity and equity-related instruments. These funds are designed to provide investors with the dual benefit of potential capital appreciation from equity investments and tax-saving benefits under Section 80C of the Income Tax Act, 1961.

Some key features of ELSS funds include:

  1. Shorter lock-in period: Unlike other tax-saving instruments with lock-in periods that range from five to fifteen years, ELSS funds have a lock-in period of just three years.
  2. At least 80% equity exposure: As per SEBI regulations, ELSS funds must invest a minimum of 80% of their assets in equity and equity-related schemes.
  3. Tax exemption under Section 80C: ELSS investments are eligible for tax deduction benefits under Section 80C of the Income Tax Act, up to a maximum limit of ₹ 1.5 lakh in a financial year.
  4. Long-term capital gains (LTCG) tax benefits: If an investor hold the units of an ELSS fund for more than one year, any gains realized up to ₹ 1 lakh are exempt from taxation. Gains above ₹ 1 lakh are taxed at a flat rate of 10%.
  5. Potential for higher returns: ELSS funds invest in equity, which historically has the potential to deliver higher returns compared to traditional tax-saving instruments like Fixed Deposits (FDs) or Public Provident Fund (PPF).
  6. Systematic Investment Plans (SIPs): ELSS funds offer the option of investing through Systematic Investment Plans (SIPs), allowing investors to invest small amounts regularly. SIPs also help in rupee-cost averaging and disciplined investing.

How to invest in tax-saver mutual funds in India?

You can follow these steps to invest in ELSS mutual funds in India:

  1. Research and choose: Research various ELSS funds offered by different mutual fund companies. Consider factors like past performance, fund manager’s track record, expense ratio, legacy of the fun house and investment philosophy before choosing.
  2. KYC compliance: Complete your KYC (Know Your Customer) process by submitting the required documents to a KYC registration agency or a mutual fund house.
  3. Select the mode of investment: You can invest in ELSS funds either through a lump sum investment or via SIPs (Systematic Investment Plans).
  4. Complete your investment online or offline: You can invest onlinethrough the mutual fund company or through an aggregator website or offline through your nearest branch to complete your investment journey.

You must conduct a risk assessment of your portfolio before investing in an ELSS mutual fund. Since ELSS funds invest in equity-related instruments, the risk factor as well as the potential return for these investments is generally higher than FDs, PPFs etc..

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