Equity Linked Saving Schemes (ELSS Funds)
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Equity Linked Saving Schemes (ELSS) are tax-saving mutual funds that invest primarily in stocks (equity and equity-related securities).
- They enable investors to avail a deduction of up to Rs 1.5 lakh from their total annual taxable income under Section 80C of the Income Tax Act, 1961, under the old tax regime.
- Other investment options available under Section 80C include the Public Provident Fund (PPF), Employees’ Provident Fund (EPF), Life Insurance Premiums, Fixed Deposits for the period of not less than 5 years as notified by Central Government (FDs), National Savings Certificate (NSC), and Housing Loan Principal Payment, among others.
- ELSS funds have a compulsory lock-in period of 3 years, which is among the lowest of all tax-saving instruments.
- ELSS funds do not have any charges (load) on entry or exit.
- Since they are diversified equity mutual funds, they also offer the benefit of potential wealth creation in addition to serving tax-saving needs.
What is the BACHAO campaign?
BACHAO is an investor education campaign by DSP Mutual Fund that encourages and attracts people to stop and recognize that they can reduce the amount of tax they pay by investing in Equity Linked Saving Schemes, popularly also known as tax saver or tax saving funds.
Who should invest in ELSS?
Anyone looking to save on taxes under the old tax regime can invest in Equity-Linked Savings Schemes (ELSS); this is the primary purpose of these funds. They are often the first mutual fund investments for individuals once they start earning a salary, contributing to their popularity—after all, who doesn't want to reduce their tax burden? Another significant reason for the appeal of these funds is the potential for gains from investing in the equity market, given that they are diversified equity mutual funds.
How much should you invest in ELSS?
Your minimum investment amount in ELSS can be as low as Rs. 500.
There is no upper limit, even though the maximum amount on which you could claim a tax deduction is currently capped at Rs 1.5 lakh per Financial Year under the old tax regime. However, recognizing ELSS as a diversified equity mutual fund, you can invest as much as you can and remain invested for the long term. This strategy will enable you to tide over volatile market cycles and also potentially gain from the power of compounding. Experts also recommend investing in ELSS via long-term Systematic Investment Plans (SIPs), as this approach can cover your Section 80C contributions under the old tax regime every subsequent financial year without needing to invest in another tax-saving product.
Since there is a 3 year lock in period, should you sell immediately after 3 years?
No, there is a 3-year lock-in period, but that does not mean you should sell your ELSS investment at the end of that period. Smart investors recognize ELSS as diversified equity mutual funds; they invest as much as they can and remain invested for the long term. The mandated lock-in period is actually beneficial for investors, as it encourages patience and allows investments time to grow—a minimum of 3 years! We usually recommend remaining invested for a longer duration. This strategy enables you to not just potentially grow your wealth and beat inflation through the power of compounding over time, but also helps you tide over any short-term market volatility. Additionally, the 3-year lock-in period allows fund managers to make better investment decisions and remain patient and unemotional through any short-term volatility.
ELSS offers better post-tax returns than many other Sections of 80C investments because ELSS is an equity-oriented mutual fund as per the Income Tax Act, LTCG of up to Rs. 1 lakh per financial year are exempt from income tax, and only gains above Rs. 1 lakh are taxed at 10% (plus applicable surcharge and cess).
What are the risks associated with ELSS?
Being an equity mutual fund, there are various common risks such as Market Liquidity Risk, Price Risk etc. Fund value can have significant fluctuation during a high volatility period & returns can become negative in the short term. Hence, we recommend investors to hold the fund for a longer duration beyond lock-in period.
Can ELSS be used for tax saving if I opt for the New tax regime? Will it be only useful if I opt for the old tax regime?
No. Under the New tax regime, investors will not be able to claim a deduction under Section 80C for ELSS investments. However, investors who choose the new tax regime can consider ELSS as a diversified equity mutual fund and not a means to save tax, for long-term wealth accumulation. ELSS will continue to function as earlier for everyone who continues with the old tax regime.