CONFUSED ABOUT ELSS? Let us understand ELSS-Tax Saving Mutual Funds.

Deciding on ELSS is confusing for a naive investor. Here we will clear about the confusion on the ELSS Tax Saving Mutual fund scheme, and if you want to understand how Elss benefits you to save Tax and wealth. Then this write-up is for you.

What is ELSS?

ELSS stands for Equity Linked Savings Scheme. It is a type of mutual fund scheme that primarily invests in equity shares of companies across different sectors and market capitalization. ELSS is a tax-saving investment option in India, where investors can claim tax benefits under Section 80C of the Income Tax Act.

ELSS funds have a lock-in period of three years, which means that investors can only withdraw their investment after the completion of three years. ELSS funds are known for their potential for high returns in the long run, as they invest primarily in equity shares of companies with strong growth potential. However, as with all equity investments, ELSS funds are also subject to market risks and may not always guarantee high returns.

Investing in ELSS funds helps save taxes and provides an opportunity to invest in the equity markets and earn potentially high returns over the long term. ELSS funds are suitable for investors with a long-term investment horizon and a high-risk appetite, as the returns on these funds are not guaranteed and are subject to market risks. It is important to consult with a financial advisor before investing in ELSS funds to determine their suitability for your investment goals and risk profile.

ELSS (Equity Linked Saving Scheme) has several benefits for investors:

1. Tax savings: ELSS provides tax savings under Section 80C of the Indian Income Tax Act, which allows investors to increase their tax savings.

2. Lock-in period: The lock-in period for ELSS investment is three years, which is lower than other tax-saving investments such as PPF or NSC.

3. Money-back option: Investors can withdraw their money after a lock-in period of 3 years, which is more flexible than other tax-saving investments.

4. Diversification of investment options: Investors can invest in different options through ELSS, which expands their investment portfolio.

5. Higher returns: ELSS invests in mutual fund shares, which allows investors to earn higher returns.

In addition to these benefits, investing in ELSS allows investors to diversify their investment portfolio, which can help them achieve their financial goals. However, it’s important to remember that ELSS investments are subject to market risks, and investors should consider their investment objectives, risks, and charges before investing.

Why do you have to choose ELSS?

1. Tax benefits: ELSS provides tax benefits under Section 80C of the Indian Income Tax Act, which can help investors reduce their tax liability.

2. Potential for higher returns: ELSS invests in equity shares, which can provide higher returns than other tax-saving investments.

3. Shorter lock-in period: ELSS has a lock-in period of 3 years, which is shorter than other tax-saving investments such as the Public Provident Fund (PPF) or National Savings Certificate (NSC).

4. Diversification of investment portfolio: ELSS allows investors to invest in a diversified portfolio of equity shares, which can help spread the risk and potentially improve returns.

However, it’s important to note that ELSS investments are subject to market risks, and past performance does not guarantee future results. Investors should consider their investment objectives, risks, and charges before making investment decisions.

How much tax can be saved by investing in ELSS?

Investing in ELSS (Equity Linked Saving Scheme) provides tax benefits under Section 80C of the Indian Income Tax Act, which allows investors to claim a deduction from their taxable income. The maximum deduction allowed under Section 80C is Rs. 1.5 lakh for the financial year 2022-23.

The amount of tax savings will depend on the tax bracket of the individual investor. For example, if an investor falls in the 30% tax bracket and invests Rs. 1.5 lakh in ELSS, they can save up to Rs. 46,800 in taxes (30% of Rs. 1.5 lakhs). Similarly, if an investor falls in the 20% tax bracket, they can save up to Rs. 31,200 in taxes (20% of Rs. 1.5 lakhs).

It’s important to note that ELSS investments are subject to market risks, and investors should carefully consider their investment objectives, risks, and charges before making any investment decisions. Additionally, tax laws and regulations are subject to change, and investors should consult with a tax professional to understand the latest tax implications of their investments.

Should my first mutual fund investment be in ELSS?

YES. The decision to invest in ELSS (Equity Linked Saving Scheme) as a first mutual fund investment depends on factors such as your investment goals, risk appetite, and investment horizon.

ELSS investments offer tax-saving benefits under Section 80C of the Indian Income Tax Act, which makes it a popular choice for many investors. However, it’s important to remember that ELSS investments come with a lock-in period of 3 years, which means that the invested amount cannot be redeemed or withdrawn before the lock-in period ends. Therefore, if you have a short-term investment horizon, consider other types of mutual funds, such as liquid or short-term debt funds.

If you have a long-term investment horizon and are willing to take on higher risks in pursuit of potentially higher returns, then investing in ELSS could be a good option. ELSS invests in equity shares, which provides investors with exposure to the stock market and the potential for higher returns over the long term. However, it’s important to remember that equity investments come with higher risks and volatility in the short term.

In conclusion, whether your first mutual fund investment should be in ELSS depends on your investment goals, risk appetite, and investment horizon. It’s important to consult with a financial advisor to understand the suitability of the investment for your specific needs and circumstances.

In ELSS, do SIPs give better returns than lump sum investments?

ELSS (Equity Linked Saving Scheme) investments through Systematic Investment Plans (SIPs) or lump sum investments have advantages and disadvantages. The better depends on the investor’s financial goals, risk appetite, investment horizon, and market conditions.

SIPs allow investors to invest a fixed amount at regular intervals, such as monthly, over some time. The advantage of investing through SIP is that it helps to average the cost of the investment over time and mitigates the impact of market volatility. Additionally, SIPs can help investors inculcate a disciplined investment approach, leading to better long-term wealth creation.

On the other hand, lump sum investments require a larger upfront investment. They can be more beneficial when the market is low, as the investor can take advantage of the lower market prices and generate higher returns over time. However, lump sum investments also carry a higher risk, as the entire investment is exposed to market volatility simultaneously.

In the case of ELSS investments, the scheme’s performance and the market conditions at the time of the investment will also impact the returns. It’s important to note that past performance does not guarantee future results, and investors should carefully consider their investment objectives, risks, and charges before making any investment decisions.

In conclusion, whether SIPs or lump sum investments give better returns in ELSS depends on various factors and cannot be generalized. It’s important to consult with a financial advisor to determine the best investment strategy based on your needs and circumstances.

Are returns on ELSS taxed?

Yes, ELSS (Equity Linked Saving Scheme) investment returns are taxable. ELSS is a type of mutual fund that invests predominantly in equity shares, and returns on equity investments are subject to taxation as per the prevailing tax laws in India.

ELSS investments have a lock-in period of three years, which means that the investor cannot redeem or withdraw the investment before the end of the lock-in period. After the lock-in period ends, the investor can redeem the investment and its returns.

The returns on ELSS investments are taxed as long-term capital gains (LTCG) as the investment is held for more than one year. The LTCG tax rate on equity investments, including ELSS, is 10% (plus cess and surcharge) if the gains exceed Rs. 1 lakh in a financial year.

It’s important to note that tax laws and regulations are subject to change, and investors should consult with a tax professional to understand the latest tax implications of their investments. Additionally, ELSS investments carry market risks, and investors should carefully consider their investment objectives, risks, and charges before making any investment decisions.