ELSS: A Mutual Fund Scheme For All Tax Payers

The biggest heartbreak happens when you receive your pay check after tax season ends and you realize that a portion of your hard-earned money is deducted by income tax. This is bound to happen if you ignore tax planning or wait till the last moment to invest in tax saving instrument without understanding the purpose behind tax saving. If you fall under either of the tax bracket, you are going to have to pay taxes till you retire. Hence, it is better to plan your tax investments well in advance to avoid any further uncalled for tax deductions.

Depending on your appetite for risk, investors can either choose to invest in a conservative tax saving instrument or opt for modern tax saving schemes. Investors are expected to understand their risk appetite before investing. If you do not carry any risk appetite you can stick to conservative tax saving schemes. However, if you carry a moderately high risk appetite and seek capital appreciation over the long term, you can consider investing in Equity Linked Savings Scheme.

What is Equity Linked Savings Scheme?

Equity Linked Savings Scheme, abbreviated as ELSS, is an open ended tax saving mutual fund scheme that comes with a three year lock in and tax benefit. ELSS is the only equity mutual funds scheme that comes with a three year lock-in and tax benefit.

Here is an example to help you understand how ELSS works –

Preyoshi Sinha is a senior chemical engineer with a chemical company who earns Rs. 12 lakhs per year. This lands her in the highest tax bracket. Preyoshi learns about ELSS from a friend and decides to invest Rs. 1.5 lakh in the tax saver fund. Now according to 8           0C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1,50,000 in ELSS and claim tax deductions for the same. By investing in ELSS Preyoshi’s gross taxable income has now come down to Rs. 10.5(12-1.5) lakhs per annum. Also, the three year lock in gives the amount invested an opportunity to accrue interest and might even help her building wealth over the long term.

Is ELSS the right tax saving scheme for all tax payers?

Equity Linked Saving Scheme is ideal for investors who carry a moderately high risk appetite. There are several benefits that ELSS investors can make the most out of. Firstly, ELSS comes with a predetermined lock-in period of three years. However, the three year lock-in is probably the shortest among other tax saving instruments under Section 80C where the minimum lock-in period of tax saving instruments can range anywhere between 5 years to 15 years.

ELSS investors can also start a monthly SIP in this tax saver fund. A Systematic Investment Plan is an easy and convenient way to invest in ELSS schemes. All an investor has to do is decide how much she wishes to invest in ELSS on a regular basis and complete all the pre-investment formalities. Once an individual becomes KYC compliant, he / she can invest in mutual funds from the comfort of your home or office. Some fund houses even offer a monthly SIP of an amount as low as Rs. 500 per month. This way, investing in ELSS has become possible for almost everyone.

Also, one can continue investing in ELSS fund even after the three year lock-in if they feel that the scheme is performing as per their expectations. Basically, one can target their life’s long term goals like retirement planning or buying their dream home through systematic and disciplined investing in ELSS funds via SIP.

If you are new to mutual funds, please consult a financial advisor before investing.

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