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A famous Australian-American philanthropist once said, “Restriction generates yearning. You want what you cannot have.” Interestingly, when you make tax saving investments in mutual funds, even with tenure restrictions, you can earn returns and own all that you have yearned, be it going for a world tour or buying your own house.
A famous Australian-American philanthropist once said, “Restriction generates yearning. You want what you cannot have.” Interestingly, when you make tax saving investments in mutual funds, even with tenure restrictions, you can earn returns and own all that you have yearned, be it going for a world tour or buying your own house.
ELSS or equity linked savings scheme is a type of mutual fund that not only helps you save tax but also helps you build wealth.
ELSS or equity linked savings scheme is a type of mutual fund that not only helps you save tax but also helps you build wealth.
Let’s know more about this equity fund.
Let’s know more about this equity fund.
What is ELSS?
What is ELSS?
Mutual funds can broadly be divided into equity funds, debt funds and hybrid funds. ELSS is an open-ended mutual fund scheme that invests a majority of its corpus in equities and equity-related securities. Unlike other mutual funds, ELSS comes with a lock-in period of three years. This means you cannot withdraw your investments within this period.
Mutual funds can broadly be divided into equity funds, debt funds and hybrid funds. ELSS is an open-ended mutual fund scheme that invests a majority of its corpus in equities and equity-related securities. Unlike other mutual funds, ELSS comes with a lock-in period of three years. This means you cannot withdraw your investments within this period.
Is the three-year lock-in period a disadvantage?
Is the three-year lock-in period a disadvantage?
First, ELSS has the shortest lock-in period as compared to other 80C tax saving investments such as PPF, ULIP, NSC, etc. Second, the lock-in period may look like a restriction, but actually, it is in your own best financial interest to stay invested in the fund.
First, ELSS has the shortest lock-in period as compared to other 80C tax saving investments such as PPF, ULIP, NSC, etc. Second, the lock-in period may look like a restriction, but actually, it is in your own best financial interest to stay invested in the fund.
ELSS is an equity-oriented mutual fund and such funds usually perform and deliver inflation-beating returns in the long run. Plus, the more you stay invested, the more your money may grow, thanks to the power of compounding. Your returns will keep adding to your investments and you will keep earning returns on returns as well.
ELSS is an equity-oriented mutual fund and such funds usually perform and deliver inflation-beating returns in the long run. Plus, the more you stay invested, the more your money may grow, thanks to the power of compounding. Your returns will keep adding to your investments and you will keep earning returns on returns as well.
How does ELSS tax saving work?
How does ELSS tax saving work?
- Tax deductions under section 80C
When you invest in ELSS, you can claim a tax deduction for your investment amount of up to Rs. 1.5 lakh in a financial year. For example, if you invest Rs. 2 lakhs in ELSS in a year, your investments of Rs. 1.5 lakhs will not be taxable. Say, you fall under the highest tax bracket of 30%. In this case, you can save Rs. 46,800 in taxes every year.
When you invest in ELSS, you can claim a tax deduction for your investment amount of up to Rs. 1.5 lakh in a financial year. For example, if you invest Rs. 2 lakhs in ELSS in a year, your investments of Rs. 1.5 lakhs will not be taxable. Say, you fall under the highest tax bracket of 30%. In this case, you can save Rs. 46,800 in taxes every year.
Remember, Rs 1.5 lakh is the maximum amount that you can claim as a deduction. However, there is no maximum limit for the amount that you can invest in ELSS. You may invest as much as you want according to your goals, financial state, etc.
Remember, Rs 1.5 lakh is the maximum amount that you can claim as a deduction. However, there is no maximum limit for the amount that you can invest in ELSS. You may invest as much as you want according to your goals, financial state, etc.
- Capital gains tax on ELSS
When you park your vehicle, you pay a certain fee. The longer your vehicle stays, the more you pay. For taxation on equity funds, it is the opposite. The longer you stay, the lesser you pay. If you stay invested in an equity fund for a year or less, your gains will attract a short-term capital gains tax of 15%. On the other hand, if you stay invested in an equity fund for more than a year, your gains on redemption will attract a 10% long-term capital gains tax. But gains up to Rs. 1 lakh per year are tax-free.
When you park your vehicle, you pay a certain fee. The longer your vehicle stays, the more you pay. For taxation on equity funds, it is the opposite. The longer you stay, the lesser you pay. If you stay invested in an equity fund for a year or less, your gains will attract a short-term capital gains tax of 15%. On the other hand, if you stay invested in an equity fund for more than a year, your gains on redemption will attract a 10% long-term capital gains tax. But gains up to Rs. 1 lakh per year are tax-free.
Since ELSS requires you to be invested for at least three years, your gains on redemption will attract a 10% long-term capital gains tax by default. Also, you will not have to pay any tax if your gains are up to Rs. 1 lakh in a year.
Since ELSS requires you to be invested for at least three years, your gains on redemption will attract a 10% long-term capital gains tax by default. Also, you will not have to pay any tax if your gains are up to Rs. 1 lakh in a year.
- Investing tax savings
Remember the thirsty crow? He had to keep adding pebbles to the pot in order to bring the water to a drinkable level and quench his thirst. Likewise, to be able to build wealth and reach your goals, you must keep adding to your investments. Investing your tax savings in the latest mutual fund schemes in India may be a smart tax planning move. The more you invest, the more wealth you may build in the long run.
Remember the thirsty crow? He had to keep adding pebbles to the pot in order to bring the water to a drinkable level and quench his thirst. Likewise, to be able to build wealth and reach your goals, you must keep adding to your investments. Investing your tax savings in the latest mutual fund schemes in India may be a smart tax planning move. The more you invest, the more wealth you may build in the long run.
How to invest in ELSS?
How to invest in ELSS?
You can either make a lump sum investment or break the sum into small amounts and invest through a Systematic Investment Plan (SIP).
You can either make a lump sum investment or break the sum into small amounts and invest through a Systematic Investment Plan (SIP).
Investing in mutual funds through SIPs can be a better option as it offers several benefits. For example, you can gain from rupee cost averaging. This means your investment cost can get averaged out over time since you invest during different market conditions. Another advantage is that you can start your SIP with an amount as low as Rs. 500.
Investing in mutual funds through SIPs can be a better option as it offers several benefits. For example, you can gain from rupee cost averaging. This means your investment cost can get averaged out over time since you invest during different market conditions. Another advantage is that you can start your SIP with an amount as low as Rs. 500.
Do you want to check how much you can make in three years even with a nominal investment amount? You can use an online ELSS calculator. You will have to enter a few inputs such as your SIP amount, SIP frequency, SIP tenure, expected rate of return, etc.
Do you want to check how much you can make in three years even with a nominal investment amount? You can use an online ELSS calculator. You will have to enter a few inputs such as your SIP amount, SIP frequency, SIP tenure, expected rate of return, etc.
You may choose the best SIP to invest in ELSS, but you must know that when you invest in ELSS through SIPs, the lock-in period of three years applies to every SIP installment.
You may choose the best SIP to invest in ELSS, but you must know that when you invest in ELSS through SIPs, the lock-in period of three years applies to every SIP installment.
To sum it up
To sum it up
ELSS is a type of mutual fund that can help you reduce your taxable income by up to Rs. 1.5 lakh per year. You can either make a lump sum investment or invest through SIPs according to your convenience.
ELSS is a type of mutual fund that can help you reduce your taxable income by up to Rs. 1.5 lakh per year. You can either make a lump sum investment or invest through SIPs according to your convenience.
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