ELSS means ‘Equity Linked Savings Scheme’. ELSS mutual funds are tax saving funds which invest money in equity or equity related instruments. These offer tax exemptions upto Rs 150,000 under section 80C of the Income Tax Act for the invested amount. You can invest in a ELSS mutual fund through a mutual fund distributor or directly by visiting the mutual fund house website.
Features of ELSS mutual funds
- As per rules, these funds have to invest minimum 80% in equity and equity related instruments
- There is no maximum tenure of investment. There is an initial lock-in period of 3 years.
- The invested amount is exempt from tax under section 80C of the Income Tax Act.
- The return/income on the invested amount is taxable at the time of redemption.
Benefits of investing in ELSS mutual funds
- Tax savings: ELSS mutual funds help to save tax to the extent of Rs 150,000 annually.
- Power of compounding: Like all mutual funds, an investor can take benefits of ‘power of compounding’ as you need to stay invested for a minimum 3 year period.
- Wealth creation: As money is invested in equities, there are better prospects for your investments to grow faster.
- No maximum period: There is no compulsion of redemption after completion of the 3 year lock-in period. You can stay invested for as long as you want. Longer the investment term, better is the wealth creation and the return.
- SIP option: This allows you to invest even small amounts at regular intervals. It reduces the year end financial strain, to accumulate a corpus to invest for tax savings.
Things to note at the time of withdrawal of ELSS
For lumpsum investments, you can withdraw/redeem the entire amount at the end of the 3 year lock-in period. The redemption after 3 years will be taxed as a long term capital gain. In case of a SIP, every SIP should have completed 3 years of lock-in period. If the SIP investment is redeemed before the 3 year lock-in period it will be taxed as a short term capital gain.
Should you invest in ELSS?
Definitely yes. It is a product suitable for everyone. Particularly, the youth who have just got their new job should invest in ELSS mutual funds and remain invested. Staying invested for a long time can generate massive returns and the youth stand to gain maximum as they have a longer time span for wealth creation. Ideally, one should invest a significant portion of their tax savings amount in ELSS mutual funds followed by NPS and PPF.
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