What are ELSS Funds? How Do They Save Income Tax?

Posted in Mutual Fund Blogs By Prabhat Singh - Feb 26,2022
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The healthier your risk appetite, the higher the rewards.

Equity-linked Savings Scheme or ELSS is one of the widely recognized mutual funds that provide you with the tax benefits under section 80 C of IT Act 1961. With a lesser lock-in period and easy to invest in options ELSS is surely a “watch out” option for all young investors. Made towards equity and equity-linked shares, ELSS is the most promising mutual fund, offering almost double returns than FDs or PPF. 

Let’s look at some of the other features that make ELSS unique and different from any other mutual funds:

Tax Exemptions

As per section 80 C of IT Act 1961, ELSS provides you with the exemption of up to 1.5 Lakhs p.a. Hence, if you fall in the upper tax bracket of 30%, then you can save up to INR 46,800 by investing in ELSS. Always remember there is no upper limit to invest in ELSS, but you will get a deduction of only up to 1.5 Lakhs. For instance, if you invest 2 Lakhs p.a., in ELSS, you will only get a rebate of 1.5 Lakhs p.a. while paying your Income-tax.

Wealth Accumulation

Apart from giving you tax benefits, ELSS also gives you a chance to assemble some early wealth in your career. It is one of the easiest ways to start investing. Also, it allows you to understand how equity investing gives you higher returns when you are willing to take higher risks. ELSS lets you invest more than 65% of your money in equity. Therefore, you can expect a higher return but higher risk as well.

Short Lock-in Period

All investment that falls under section 80 C demands a long lock-in period. While PPF requires as long as 15 years, FD demand five years lock period to give you a higher return on investments. However, with ELSS, you can maximize your returns with as low as three years of the lock-in period. These three years ensures that you get the maximum returns possible.

Inflation Beating Returns

ELSS is one of the only few funds that have the potential to give back the inflation-beating returns. 

Beating inflation means getting the return more than the inflation rate in the economy. 

A Systematic Investment Plan

Like any other investment ELSS, allow you to invest through various Systematic Invest Plans or SIPs. Hence, it helps you manage your finance well. SIP allows you to invest in ELSS throughout the year, giving you the chance to invest more when the market is bearish and invest less when the market is bullish. So, you can put your money based on the behaviour of the market, ensuring less risk.

Also read: Best Ways to Save Tax with a Fixed Deposit

Things you should always keep in perspective before investing in ELSS

  • An expensive Investment outlook: 

If you are willing to get the maximum returns, you need to have around five years of the investment horizon. These years will overcome all the situational or short-term volatilities and provide you with the maximum return possible.

  • No Guarantee Returns: 

Always remember, ELSS does not guarantee any return, as its performance is entirely market dependent. So, don’t get excited by hearing higher returns; read the terms & conditions every time. Also, some experts suggest that only if kept for a prolonged time ELSS can prove very beneficial for your finance.

  • 3-Year Lock-in Period: 

You can push and pull your money in and out of ELSS every day. You need to lock in your money for three or more years. It is less when compared to its counterparts in section 80 C, while the returns delivered is maximum.

Robert G. Allen once said, “How many millionaires do you know who invested in a savings account?” Similarly, with ELSS, you take the risk & in return, you earn a high ROI. So, be ready to accumulate your wealth and save some taxes with ELSS.

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