In order to save taxes, many financial instruments are available in the market to invest. These investments can be claimed as deductions to reduce taxable incomes. Among these investments is ELSS mutual fund — equity-linked saving scheme. It is a mutual fund scheme under which asset management companies (AMCs) put their corpus in equities.
What Is ELSS?
ELSS is a mutual fund savings schemes through which an individual can invest in equities. Various fund houses offer this schemes. Some of these schemes are IDFC Tax Advantage, Canara Robeco Equity Tax Saver, Mirae Asset Tax Saver Fund and DSP Tax Saver.
ELSS has a lock-in period of 3 years, before which the investor cannot pull out their money. They have to complete three years from the date of unit allotment in order to sell the underlying mutual fund units.
The number of units allotted to an investor depends on the money invested by the investor and the applicable NAV.
Tax Saving Through ELSS
“An ELSS is an Equity Linked Savings Scheme, that allows an individual or HUF a deduction from total income of up to Rs 1.5 lakh under Section 80C of Income Tax Act 1961. Thus, if an investor was to invest Rs 50,000 in an ELSS, then this amount would be deducted from the total taxable income, thus reducing her tax burden,” according to mutualfundsahihai.com.
It can save up to Rs 46,800 a year in taxes.
Risk Involved
As amount under the equity linked saving scheme is invested in equities, ELSS is a very high risk scheme. However, it can also offer high returns in case of market growth. The ELSS mutual fund also has a lock-in period of 3 years. So, if the investor want to book loss or profit in times of valatility, he/ she cannot do that before the completion of 3 years. However, other tax saver instruments like FD have a lock in period of 5 years.
How To Invest?
Investors can invest in ELSS as a lumpsum amount or through systematic investment plan (SIP). Under the SIP, a particular amount of investment is made every month. Investors can invest any amount in ELSS, there is no upper capping; while the minimum investable amount varies across fund houses.
“Investing a lump sum is not advisable unless the markets are gripped by a bearish trend, and you are willing to take higher risk levels and have a longer investment horizon. You miss out on the opportunity to purchase fund units across business cycles, which requires you to stay invested for longer than 5-7 years to realise good gains,” according to cleartax.in.
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