Earn More and Save Taxes - ELSS

Equity – Linked Saving Schemes

Equity Linked Saving Scheme (ELSS) is a mutual fund offered by mutual fund companies that allows investors to save tax up to ₹1,50,000. It is one of the most suitable option under mutual fund. As the name suggests, in an equity-linked saving scheme the fund of the investor is invested in the listed equity shares. The returns generated in this scheme are market linked. This scheme also provides the option to the investor for the lowest minimum lock in period i.e., 3 years.

 Benefits associated with Equity Linked Saving Schemes

1. Monthly Payments: Systematic investment plan (SIP) is the best option for buying a mutual fund subscription. A SIP is investing a small fixed sum in a mutual fund at regular intervals, usually on a monthly basis. Since, money is invested at regular intervals therefore, it assists the retail investor in reducing the effect of market fluctuations. It gives the investor flexibility to change the investment amount of SIP or even stop investing the plan.

2. Higher Returns: Since the ELSS funds are market driven as the amount is invested in the listed equity shares thus, the average rate of return can be higher than Fixed Deposit (FD) or Public Provident Fund (PPF) depending on the performance of shares. There is a potential of higher average rate of return when invested for the period of 3-5 years.

3. Lower Investment: ELSS is a very suitable investment opportunity for retail investors as it does not require to invest lump-sum amount at one time. The initial investment amount can be as low as ₹500 and multiples thereof.

4. Tax Savings: ELSS is a very suitable option for tax planning for retail investor as the investment in these funds provide tax benefit of up to ₹1,50,000 u/s 80C of the Income Tax Act 1961. These are considered as one of the most popular tax saving investment choices. Since, the investment has a minimum lock-in period of 3 years therefore, the gains earned are taxable as a Long-Term Capital Gain which has a lower tax as compared to the Short-Term Capital Gains.

5. Transparency: There is a complete transparency between the funds invested in the ELSS as the investor is completely aware of the transaction and fund details which are the part of the investment portfolio.

Options for making investment in ELSS

      1.  Growth Option: In this option the income (dividend) earned by the fund can not be withdrawn by the investor, during the time it holds the fund. The dividend income and profit earned by the fund is added back to the fund that increases the NAV and vice-versa. This option has the better potential of generating profits as the NAV keeps on increasing with the increase in income. The investor can only realize his long-term profits/losses after selling its holdings in the fund.

     2.  Dividend Option: This option allows the investor to withdraw the dividend incomes earned on the funds. The dividend earned on these are non-taxable. The date of dividend distribution is decided by the fund. The dividend will be distributed only if the income earned by the fund is positive.

    3. Dividend Reinvestments Option: In this option the investors are allowed to reinvest the dividend earned on the fund and this increases the NAV. The dividend reinvested by the investor are invested as a fresh purchase and the investor can also claim the deduction on the amount of dividend reinvested.