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2 mins Read | 2 Years Ago

ELSS Mutual Funds: Know About Tax Saving Mutual Funds

What is ELSS Fund: Tax Saving Mutual Fund

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Equity Linked Saving Schemes or ELSS, often referred to as tax-saver funds, are diversified mutual funds that primarily and principally invest in equities, but simultaneously allocate some proportion of their funds to the debt market, as well.

These funds are known as Tax Saving Mutual Funds, as they fall under Section 80C of the Income Tax Act, by using which, one can claim deductions up to Rs 1,50,000 a year. By investing in them, one can save a total of Rs 46,800 a year, in taxes.

However, there is a catch with these ELSS mutual funds. They come with a compulsory lock in period of three years, which is the shortest possible option among all others, provided under Section 80C.

Let us dive a little further into ELSS funds. 

Features of an ELSS Mutual Fund:

  1. Dual Benefit:

    ELSS funds are the only type of funds in the Indian market, that give you the dual benefit of a tax rebate and wealth appreciation. Under Section 80C of the Income Tax Act, 1961, one can save Rs 46,800 in a year, as tax deductions. Meanwhile, your funds are funnelled into the equity markets. Given a long enough timeline, they can earn handsome returns for the investor.

  2. Returns can beat inflation:

    One of the prime advantages of these tax-saving investments is that they have the capacity to beat the rate of inflation, unlike Fixed Deposits and funds in Savings Account, which deliver returns that consistently fail to cross the inflation rate. Being invested in ELSS funds for the long run can deliver great returns, which can beat the inflation rate by a long margin.

  3. Managed by Financial Experts:

    ELSS Mutual Funds are managed by fund managers who have an impeccable track record of managing portfolios and delivering returns, that trump benchmark performance. Their decisions are based on granular research and detailed analysis, and the pros and cons of every decision is carefully weighed before executing. All of these calculations go a long way in creating wealth for the investor.

  4. Shortest lock in period:

    Out of all the options that are presented under Section 80C, as a way of availing tax rebates, ELSS Mutual Funds have the shortest lock in period of three years. Investment in these schemes can help the investor preserve and appreciate his wealth over the course of a few years.

What should you consider before investing in ELSS?

Before investing in an Equity Linked Savings Scheme (ELSS), there are several factors that you should carefully evaluate. These factors can help you make informed decisions and maximise the benefits of this investment option:

1. Investment horizon: It is important to have a long-term perspective when considering ELSS funds. With an investment horizon of more than five years, you can manage market volatility better and enjoy higher returns. ELSS funds primarily invest in equities, which tend to perform well over extended periods.

2. Returns: ELSS funds don't offer guaranteed returns. Their performance is directly linked to the stock market. However, the longer you invest, the higher is the likelihood of potential returns. ELSS can outperform other tax saving investments in the long run.

3. Lock-in period: ELSS has a mandatory lock-in period of three years. During this time, you cannot redeem your investments. This lock-in period is shorter than other tax saving options like PPF or NSC, making ELSS a more liquid choice.

How to invest in ELSS funds?

Investing in an Equity Linked Savings Scheme (ELSS) is similar to investing in any Mutual Fund (MF). The simplest approach is through an Online Investment Services Account, offering flexibility for lump-sum or Systematic Investment Plan (SIP) investments.

SIP fosters regularity and discipline, mitigating capital risk. With ELSS funds, you can start investing with as little as Rs 500. Although tax benefits are capped at Rs 1.5 lakh, there's no limit on your investment amount.

This versatility allows you to tailor your investment strategy to align with your financial goals and risk appetite, offering a user-friendly and customisable route to explore ELSS opportunities.

Ways to Invest in ELSS Funds

Here are the three ways to invest in ELSS funds:

  • Growth option

Choosing the growth option in ELSS means you won't receive periodic dividends. Your gains are released only when you redeem your investment, potentially leading to an increase in the total Net Asset Value (NAV) and thus, enhancing your profits. However, it's crucial to remember that these returns are influenced by market fluctuations.

  • Dividend option

With this option, you receive dividends periodically. It's important to note that these dividends are taxed according to your tax bracket. Additionally, dividends exceeding Rs 5,000 attract a 10% Tax Deducted at Source (TDS).

  • Dividend Reinvestment Option

This option allows you to reinvest your dividends back into the fund, increasing the NAV. It is particularly beneficial during market upturns, as it can capitalise on positive market trends.

Tax benefits offered by ELSS Funds

Equity Linked Savings Scheme Funds offer tax efficiency and the potential for robust returns, making them a preferred choice for tax-saving investments while building wealth. Here are the major tax benefits offered by these funds:

  • Section 80C deductions: ELSS investments qualify for deductions under Section 80C, allowing investors to claim up to Rs 1.5 lakh in deductions from their taxable income.

  • Maximum tax savings: Investors can reduce their taxable income and save up to Rs 46,800, depending on their tax bracket.

  • Long-term capital gains tax: Post the lock-in period, investors can redeem their ELSS holdings. Any gains are liable to a 10% long-term capital gains tax. But if they fall within the limit of Rs 1 lakh, no tax is levied. It enhances ELSS as a tax-efficient wealth-building option.

Remember, ELSS Funds have a mandatory three-year lock-in period, which also helps in long-term wealth creation.

Comparison of ELSS (Equity Linked Savings Scheme) with other tax saving instruments

While numerous tax saving schemes like FD, PPF and NSC exist, their returns still need to be improved. Here, ELSS shines with potentially higher returns, particularly during market upswings.

With just a three-year lock-in period, ELSS Mutual Funds emerge as the top tax saving choice. Even when considering post tax returns, ELSS outperforms other tax saving options.

 

Investment

Returns

Lock-in period

Tax on returns

5-Year Bank Fixed Deposit

4% to 6%

5 years

Yes

Public Provident Fund (PPF)

7% to 8%

15 years

No

National Savings Certificate

7% to 8%

5 years

Yes

National Pension System (NPS)

8% to 10%

Till retirement

Partially taxable

ELSS Funds

15% to 18%

3 years

Partially taxable

Conclusion:

Investors can choose to invest in a Tax Saving Mutual Fund of their choice, by visiting the ICICI Bank’s website. ICICI Bank brings to its customers, the best of ELSS funds that are designed to preserve investor wealth and meet their risk appetite. These Mutual Funds give investors a reliable opportunity for long-term capital growth and protection. One also has the option of investing through a SIP and can start at as low as Rs 500, monthly.

ELSS Funds Popular FAQs

  1. How does ELSS work?

An Equity Linked Savings Scheme (ELSS) functions by primarily investing in equity and related instruments. With a typical lock-in period of three years, ELSS promotes long-term investment, offering potential capital appreciation. It also provides tax benefits under Section 80C of the Income Tax Act. 

  1. What are the tax benefits of ELSS funds?

ELSS funds qualify for Section 80C deductions up to Rs 1.5 lakh, potentially saving up to Rs 46,800 in taxes annually, depending on the investor's tax bracket. Additionally, long-term capital gains are taxed at 10%, with no tax on gains up to Rs 1 lakh, enhancing their tax efficiency.

  1. How do you start investing in ELSS?

To start investing in ELSS, you can choose between a lump sum investment, where you invest a large amount at once, or a Systematic Investment Plan (SIP), where you invest smaller, regular amounts over time. Complete the Know Your Customer (KYC) process and then submit the application form with the necessary details and documents. 

  1. How do you buy ELSS online at the ICICI Bank?

To purchase ELSS online through the ICICI Bank, follow these steps:

  1. Open or use your existing ICICI account.

  2. Log in, navigate to the Mutual Fund (MF) section and choose the preferred ELSS fund.

  3. Fill in the required details, specify the investment amount and proceed with the online purchase.

  1. How do you calculate ELSS returns?

The formula to calculate ELSS returns is:

 FV = C(1+r)^t

 Where,

FV - Future value of investment

C - Initial investment amount

r - Expected rate of return

t - Tenure

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