Tax saving is an essential aspect of personal finance management. Everyone wants to save themselves from taxes. Hence, as a result, many schemes are available to help you save tax to a certain extent.
Down below, we have discussed everything there is you should know regarding the Equity Linked Savings Scheme (ELSS) mutual fund scheme. This scheme is the first option investors seek for legally availing beneficial tax saving options. The scheme has been discussed thoroughly, along with its pros and cons, and how you can apply for it.
What Do You Mean By Equity Linked Savings Scheme (ELSS)?
In this article
ELSS is the acronym Equity Linked Savings Scheme. This is a type of mutual fund that has great benefits. Taxes up to Rs 46,800 are saved from the clutches of the government. The best fact is that these are all legally protected under Section 80C of the Income Tax Act of 1961.
ELSS comes under the management of experienced professionals called as fund managers. Also, these types of mutual funds come under TDS deductions too. They can save taxes up to Rs 46,800, i.e., on an investment of about Rs 1,50,000, and TDS of 30% is applicable.
What Are The Main Features And Benefits Of Equity Linked Savings Scheme (ELSS) Funds?
i. The Lock-in period is the duration within which a loan can have a clearance, or an investment matures. The loan lock-in period is the time to complete payments early to save oneself from penalties.
The Lock-in period for Equity Linked Savings Scheme is around 3 years. This means you cannot withdraw your money invested before a stipulated period of 3 years. Now, this time is the lowest as compared to other existing schemes in the market. Hence, this scheme is gaining much popularity nowadays. There are many schemes too, but these have a lock-in period which is higher than 3 years.
Hence, you can say that ELSS funds provide you with tax benefits and savings in a period as low as 3 years. Thus, this scheme is the most flexible often, which doesn’t take long to show results. This 3-year period is mandatory. It makes sure that the investors remain invested in the scheme and don’t go for early withdrawal. This scheme provides much higher benefits in the long run. The outcomes are very effective too.
ii. Under Section 80C of the Indian Income Tax Act of 1961, ELSS offers you tax-benefits. The amount you have invested would come in this benefit, and hence, you can have benefits up to Rs 1 lakh.
Many investors bend more towards Equity Linked Savings Scheme (ELSS) more than other 80C schemes. This is because of this tax-planning benefit. You would be receiving great help in a situation wherein your main aim is to achieve a financial aim.
iii. Better Growth and Returns are inclusive in this scheme. However, the dividend is pretty much taxable under law at a rate of 11.65%. When you receive your profits, you can re-invest and continue your growth. You can say that the return accepted through the ELSS schemes are much better than most schemes. Except for PPS and NPS, the ELSS provides better results than other related schemes.
iv. It is effortless to invest in ELSS equity funds. The investments happen at even Rs 500, and this is very convenient. You can invest money and get benefits. Also, better post-tax returns through SIPs or as termed lumpsum are available.
Also, it is straightforward to invest in the Equity Linked Savings Scheme online as well as offline. There are many Asset Managing Companies or AMCs through with you can apply online. Also, if you are seeking a traditional offline way, fill a form, and submit it. Submission is to be at the nearest branch of your most preferred fund house.
v. As explained above, if it is too late to invest in any other option, then many investors turn to ELSS to save taxes. This is risky as the investors would have to put in the entire investment as lumpsum. This may be damaging as the market is very unpredictable, and it could be very high at the time of investment.
Hence, in such cases, it is better to invest money via SIP or Systematic Investment Planning. ELSS is very beneficial in satisfying long-term financial aims. Hence, you can manage and average out your cost per unit of buy.
vi. One more feature is that mutual funds are taxable too. ELSS are taxable too and hence, are taxable like any other investment option. The amount is not touchable before a mandatory period of 3 years. LTCG or Long Term Capital Gains Tax is applicable here in cases of ELSS.
An LTCG of 10% on profits and returns above Rs 1 Lakh is applicable. In the cases of investment under the Equity Linked Savings Scheme. This is how one can save taxes through SIP and achieve his/her financial goals.
vii. Diversification of assets produces a major benefit through ELSS schemes. Assets diversify under equity categories. Hence, assets stand allocation under small, mid, or large-cap equity stocks.
When you invest in ELSS, you can expect to diversify. It includes your entire assets invested. You can save taxes and expect great returns as well. Also, through the usage of SIPs, you can have great long term benefits and lower many of the market risks.
Claiming Your Tax Deduction With The Help Of Equity Linked Savings Scheme (ELSS)
If you have invested Rs 1,50,000 by the Section 80C of the Indian Income Tax Act, 1961, you have to follow the given steps:
First, fill the form of ELSS funds through the online or offline traditional method. Your employer would’ve provided you with a Form 16. You have to upload this on the same during form filling or attached in cases of offline mode.
When applying online, you have to look for “Tax Deductions under ELSS.” You can mention the same during traditional form filling. Afterward, fill out the details. You are your annual taxable amount. The above-mentioned principle you have invested won’t count. After you clear all taxes and other financial formalities, you would have saved a good chunk of money.
The Disadvantages Of The Said Scheme:
i. NRIs from the USA or even Canada won’t be able to invest in this scheme. Also, mutual funds are subject to market risks, and hence, the returns are not guaranteed. Those who have faith in conservative investment types can’t invest in this scheme. This is because it is an equity-based investment strategy. Also, the money received after 3 years of lock-in period would be taxable too under LCGT.
ii. No premature withdrawal is allowed under this scheme before a period of 3 years. This fact is already made available to you at the start. This is not suitable for some investors. Also, there are lots of documents and paperwork involved. It takes time to invest in this scheme because of this. For example, if you invested the principle amount on 22nd April 2020, you cannot take up the money before 22nd April 2023.
iii. Hence, you can say that the Equity Linked Savings Scheme is a very disciplined form of investment. With a must-follow period of over 3 years, this scheme is very beneficial for those ready for risks. This scheme has been well-managed by professionals. You can end up getting huge benefits through this scheme.
The Difference Between Equity Linked Saving Scheme (ELSS) And Public Provident Fund (PPF)
Public Provident Fund or PPF is another source for saving tax. ELSS provides you with higher returns on the principal amount is invested. But, this PPF scheme comes with a more elaborate approach to investment options.
i. The PPF falls under government management. Hence, you can say that this scheme is a safer option. It is not market governed.
ii. The rate decided here is by the government of India. Whereas, in the case of ELSS, the rates are generated by market trends and schemes.
iii. However, it should be noted that the lock-in period in PPF is way higher, i.e., 15 years. Hence, the patience of the investor is tested here.
iv. Then comes the question of volatility. There is a fixed rate, and hence, fixed interest would be generated in PPF. The nature of ELSS is volatile, i.e., it fluctuates.
v. There is a time cap in the PPF scheme, and this is 15 years. If there’s more to invest, only 5 years are exceeded. Where in cases of ELSS, there are no time caps.
A Few Good Places To Invest In Equity Linked Savings Scheme (ELSS)
- Aditya Birla Sun Life Tax Relief 96 Funds.
- Mirae Asset Tax Saver Fund.
- Axis Long Term Equity Fund.
- Motilal Oswal Long Term Equity Fund.
- DSP Tax Saver Fund.
It is concluded that anyone can take a chance to invest in ELSS. There are no restrictions except for the lock-in period. The risks are balanced by the high returns too. For experienced investors, this is a more profitable scheme.
Therefore, it is very beneficial to invest in such a scheme. Hence, you can say that this scheme is better than most of the schemes available.
Mutual Funds Schemes And What Do They Stand For?
Hence, there exists a scheme termed as mutual funds. Mutual funds have always been the foremost choice of investors who seek high returns. These schemes are very much prevalent and appreciated as they are easy to comprehend.
A mutual fund works by collecting money from investors. The money finds usage in MNCs, etc. There is a division of the returns among the people who invest. Hence, such schemes work based on the market situation of that period.
Hence, they are a high-risk form of investment. However, low-risk investments are existing out there too. However, they are not much profitable. Hence, people choose to invest in high-risk schemes.
Depending Upon The Nature Of The Investment, These Funds Have 3 Types:
i. Equity-oriented: About with shares of companies, MNCs, etc.
ii. Debt-oriented: About treasury bills, bonds, etc.
iii. Hybrid: Those that include the investments in both of the above types. It depends upon where 65% of the whole principle is present.
Any investor who is new to the market’s ways and means and has not much knowledge considers this option. Out of all the liquid investment options, mutual funds have the biggest takers. Also, investments are as low as RS 500.