An Equity Linked Saving Scheme (ELSS) is an open-ended equity mutual fund that invests primarily in equities and equity-related products. They are a special category among mutual funds that qualify for tax deductions under Section 80C of the Income Tax Act, 1961. As a result, they are popularly known as tax saving mutual funds.
Benefits of Investing in ELSS Mutual Funds?
ELSS mutual funds provide the opportunity to earn reasonable returns and save tax. These funds invest at least 80% of the scheme’s assets in equities. So, the returns you could earn on them are directly linked to the stock market’s performance. This can be a suitable option if you want to invest for long-term goals such as creating a retirement corpus or buying a new house.
You can avail a tax deduction on investments up to Rs. 1.5 lakh every year. These funds also have a mandatory lock-in period of three years. This is one of the shortest lock-in period among all tax-saving investment avenues available. All these benefits make ELSS funds a popular investment option among investors.
Features of Equity Linked Saving Scheme (ELSS funds)
A brief lock-in period -
Popular tax-saving products such as the Public Provident Fund (PPF) or tax-saving Fixed Deposits (FDs) come with extended lock-in periods. For instance, PPF has a lock-in period of 15 years, while tax-saving FDs have a lock-in period of five years. In comparison, ELSS funds have the shorter lock-in period of just three years. This can give you the option of withdrawing your funds at an earlier date in the event of any pressing financial goals.
Inflation-beating returns -
Equity Linked Saving Scheme funds invest predominantly in the stock market. Thus, they have the potential to earn higher yields compared to other traditional tax-saving options
Tax treatment -
You can save tax under Section 80C on investments up to Rs. 1.5 lakh every year. Long Term Capital Gains (LTCG) up to Rs. 1 lakh are exempt from tax. But if your returns exceed Rs. 1 lakh during a year, you are liable to pay LTCG tax of 10% on your returns. Despite this, ELSS remains a popular tax-saving investment avenue among Indian investors.
Disclaimer: Mutual fund investments are subject to market risks. Read all scheme related documents carefully.