This tax-saving season if you haven’t yet decided which tax instrument to invest in, you can consider saving tax with Equity Linked Savings Scheme (ELSS).
If you wish to invest in ELSS too, there are a few things that you need to know about this tax saver fund before investing.
ELSS is an equity mutual fund scheme
ELSS is a mutual fund scheme that invests in equity and equity-related instruments of publicly listed companies spread across market capitalization. Hence the name ‘equity linked’. Of its total assets, an ELSS may invest anywhere between 65 percent to 80 percent in the equity market. The fund manager may choose to invest the remaining of the portfolio in fixed income securities and debt instruments. Since these funds invest in the equity market, they carry a very high investment risk and hence investors must know their risk appetite before investing.
ELSS comes with a short lock-in period
Of all the other tax saving instruments that come under Section 80C of the Indian Income Tax Act, 1961 ELSS probably has the shortest lock-in period. ELSS comes with a predefined lock-in period of 3 years. This means that once you start your investment journey with ELSS you cannot redeem the units for a minimum period of 36 months from the initial date of purchase. This lock-in period is quite short if you compare it to other tax saving instruments like FDs and PPFs that come with a statutory lock in period that may span anywhere between 5 to 15 years or even more.
ELSS offers long term capital appreciation
Since ELSS is an equity-oriented mutual fund scheme, it should be considered by investors only for long-term investing. Schemes that are linked to the equity market take time to show their true potential. In the short run, such schemes may even generate negative returns, however in the long run investors might be able to accumulate a commendable corpus. Thus, if you have any long term financial goals like building a wedding corpus for your child or if you want to build a retirement corpus so that you can live your sunset years without any financial burdens, then you can consider investing in ELSS for a longer duration.
ELSS has a SIP option
Since you will be investing in this tax saver fund for at least three years, it is better to start a monthly SIP in the ELSS fund. A Systematic Investment Plan or SIP is a simple and easy way to ensure that you save and invest a fixed sum regularly in the ELSS scheme. Investors can decide how much they want to invest and then invest this sum at fixed intervals (typically every month) throughout the fiscal year to save tax. If you invest in an ELSS fund via SIP for a longer duration, you might be able to compound your small investments into a wealthy corpus. Investors can also benefit from other SIP features like rupee cost averaging where their average cost of purchase of units minimizes and thus increases their overall gains.
ELSS is eligible for LTCG tax
Since you cannot withdraw ELSS investments for a minimum of 3 years, capital gains from ELSS are not eligible for short term capital gains tax (STCG). However, any capital gains exceeding Rs 1 lac are eligible for a long termcapital gains tax (LTCG) that stands at 10% flat.
