An Equity Linked Savings Scheme or ELSS is a type of equity mutual fund that allows you to reduce your tax liability. Under Section 80C of the Income Tax Act, individuals/HUF (Hindu Undivided Family) can claim deductions of up to Rs. 150,000 in a financial year by investing in ELSS funds.
But, do you know how to invest in ELSS funds? If not, then the following sections might help you.
As per SEBI regulations, ELSS must have at least 80% of total assets invested in equity or equity-related instruments. These are open-ended mutual fund schemes with a statutory lock-in period of three years. It means that you can redeem/sell the fund’s units only after three years of investment. ELSS funds have the shortest lock-in among similar tax-saving instruments.
Besides offering tax savings of up to Rs. 46,800, ELSS funds can generate high returns for investors owing to the equity exposure. ELSS funds have a diversified portfolio as fund managers of these schemes invest in stocks across different market capitalisations and sectors. This, in turn, mitigates portfolio risk.
These mutual fund schemes offer two options- growth and dividend. The dividend option is suitable for investors seeking regular cash flows from their investments. On the other hand, the growth option is ideal for individuals whose main objective is capital appreciation.
Also Read – How Does An ELSS Calculator Work?
To know how to invest in ELSS funds, you need to be KYC compliant. You can choose to carry out the process online or offline. If you are not KYC compliant, you can complete the KYC process online from the website of any AMC.
Follow these steps to invest in ELSS funds:
Step 1: Register on the website of your preferred AMC. You will have to submit a few basic details, such as mobile number, PAN, and email ID. After entering the PAN, the website will automatically detect whether you are KYC compliant or not.
Step 2: If you have already completed the KYC process, you can simply choose the scheme you want to invest in and the option you want to select. You can also choose between a lump sum and SIP investment, as per your requirement.
Step 3: After entering these details, you can complete the payment through your bank account.
Before investing in an ELSS fund, check if the plan is direct or regular. A direct plan is offered directly by the AMC. Thus, the expense ratio is lower. Meanwhile, regular plans entail third-party agents who charge a commission from the AMC. This results in a higher expense ratio.
That said, you can invest in the Navi Long Term Advantage Fund, which has an expense ratio of just 0.38%. This is a suitable option if you want to save tax and grow your wealth at the same time.
Visit www.navimutualfund.com and start your investment journey.
Also Read: Mutual Fund Schemes For Students
After knowing how to invest in ELSS funds, it is also essential for you to know the features of this fund. They are as follows:
The offered by ELSS funds are as follows:
In comparison to National Savings Certificate and PPF, which have a lock-in period of 6 years and 15 years, respectively, ELSS funds feature a lock-in period of just 3 years. Thus, investors with a short or medium term investment horizon may also consider investing in ELSS funds.
The Equity Linked Savings Scheme allows investors to claim tax benefits of up to Rs. 1.5 lakh as per Section 80C of the Income Tax Act, 1961.
In the case of ELSS funds, most of the amount is invested in equity and equity-related instruments. Thus, if the market performs well, one can gain substantial returns from this investment. Furthermore, if the fund manager is efficient, you can earn maximum ROI as the economy rises.
ELSS funds also feature a low minimum investment limit of just Rs. 500. So, even individuals with a low monthly income can invest in this type of mutual fund scheme.
Now that you know the features and benefits of ELSS funds and the prerequisites of how to invest in ELSS funds, make sure to consider the following factors before you invest in this type of fund:
Many individuals invest in ELSS funds just to save tax. If tax saving is your sole aim, then there are several other options available under the Income Tax Act. Before investing in ELSS funds, you need to create an investment plan that will help you achieve your financial goals.
A vast majority of investors make the mistake of investing in an ELSS fund in a hurry and end up making a lump sum investment. This could carry certain risks, especially if the valuations are high. Since ELSS investments are usually ideal for long-term goals, a SIP could help you in averaging your cost of investment per unit.
Also Read: Sectoral Mutual Funds
Capital gains from Equity Linked Savings Schemes are treated just like other equity-oriented mutual funds for taxation purposes. Dividends received from these mutual funds are added to your annual income and taxed as per applicable income tax slabs.
Owing to its lock-in period of 3+ years, short-term capital gains (STCG) tax is not applicable for ELSS funds. Long-term capital gains (LTCG) tax is applicable at a 10% rate on gains arising due to the redemption of units.
Since the 2020 budget, certain changes have been made to the taxation of ELSS funds. Under the new regime, individuals gained the facility of lower tax slabs at the cost of various deductions/exemptions offered by Section 80C of the IT Act, 1961. That said, individuals could still follow the old regime and avail tax deduction of up to Rs. 1.5 lakh.
As per SEBI regulations, investors holding units of an ELSS fund are liable to pay LTCG for capital gains upon redemption/sale of these units after one year from the purchase date. Hence, taxation of ELSS funds is applicable only after the 3-year lock-in period.
There is a tax exemption for long-term capital gains of up to Rs. 100,000 in a financial year. Profits above this are taxed at a 10% rate.
Let us take the example of Mr Kaur, who had made a lump sum investment of Rs. 3 lakh in an ELSS fund on August 1 2018 at a NAV (Net Asset Value) of Rs. 50. He decides to redeem all 6000 fund units on August 1 2021 at a NAV of Rs. 80. Thus, his investment amount on maturity is Rs. 80 x 6000 = Rs. 480,000.
The value of the capital gains would be (Rs. 480,000 – 300,000) Rs. 180,000. Out of this, Rs. 100,000 would be exempted from LTCG, while the other Rs. 80,000 would be taxed at a 10% rate of 10%, thus amounting to Rs. 8000.
Also Read – Open Ended Mutual Funds
Equity Linked Savings Schemes have the potential to generate higher returns than traditional tax-saving instruments like tax-saving FDs, PPF, etc. Furthermore, it comes with the lowest lock-in period. This is why many investors purchase units of this mutual fund.
Now that you are familiar with the meaning and taxation of ELSS funds, you can consider investing in the Navi Long Term Advantage Fund to reduce your tax liability. Visit popular platforms like Groww, PaytmMoney, INDmoney or Zerodha to purchase units of this mutual fund scheme.
Ans: Here are some factors that you must take into account before investing in ELSS funds:
Lastly, you must choose the investment route. For investors, there are two available options- lump sum and systematic investment plan (SIP).
Ans: The following can consider investing in ELSS funds:
Individuals looking to reduce their tax liability
Investors seeking exposure to equity
Individuals looking to get access to professional expertise with regard to investments
Investors looking to earn higher returns than conventional tax-saving instruments, for example, NSC, tax saving fixed deposits and PPF.
Ans: No, asset management companies do not impose an exit or entry load in the case of Equity Linked Savings Schemes. As mentioned above, these funds come with a lock-in period of 3 years. Individuals cannot opt out of such a scheme before this timeframe.
Ans: Yes, you can invest in an ELSS fund via a Systematic Investment Plan (SIP) which involves investing a small sum at regular intervals. You can pick your SIP frequency as per your comfort to accumulate wealth.
Ans: A direct plan in mutual funds refers to a scheme that is offered directly via a fund house. Individuals can opt for a direct plan by visiting the website of the fund house. Alternatively, they can choose to invest via leading online platforms such as Groww and INDmoney.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.