ELSS Funds: Turbocharge Your Wealth with Tax-Smart Investing

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Now, one might think from the past conversations Jay had with his friends about mutual funds, they already might be starting SIPs, but no they had more questions. One of his friends asked, “Enough about risks and returns, what about tax benefits?” You don’t have tax benefits right? As far as I know, equity funds don’t be deducted under 80c.

For this, our versatile and well-informed Jay answered that ‘yes normally mutual funds don’t have tax benefits, but there is a special kind of fund, specially made for this- Equity Linked Savings Scheme Funds(ELSS).

So, what are ELSS?

ELSS or Equity Linked Savings Scheme is the only fund that is eligible for tax deductions under the provisions of Section 80C of the Income Tax Act, 1961. In ELSS funds almost 65% are allocated towards equity and equity-linked securities such as listed shares. The rest are exposed to fixed-income securities.

So, what is the Catch? Why the Exception?

Well, the exception here is that there is a lock-in period of a minimum of 3 years. There are no provisions to make a premature exit. Also, there is no upper limit and the lower limits fixed by Asset Management Companies are also affordable.

Best of Both Worlds

ELSS funds have The twin advantage of tax benefits and the potential to offer great returns. Since they are invested in equity-based assets, they have the potential to beat inflation too.

To add a feather to the cap, they also come with security, since they have some exposure towards fixed-income securities as well.

Now, before we learn more about the Features of ELSS, let us compare other tax-saving instruments and understand which is better.

One of the greatest advantages of ELSS funds is that it has a minimum lock-in period compared to other investments that come with tax benefits and a long maturity or lock-in period. Also, historically they have the highest returns as well, 15% to 18% to be precise. What more do you need?

Ahh yes, How much Do you Save?

You can claim tax benefits of up to RS1,50,000 a year and save up to Rs 46,800 a year in taxes.

How is Tax Calculated?

When investing in ELSS (Equity-Linked Saving Scheme), your investment falls under Long Term Capital Gains (LTCG) after a 3-year lock-in period. Here’s a simplified tax calculation:

1. Investment: Let’s say you invest ₹3 lakh in ELSS.

2. Post Lock-in Redemption: After 3 years, you redeem the ELSS at ₹3 lakh. Following the exemption criteria (₹1.5 lakh is exempted from tax), your taxable income is ₹1.5 lakh.

3. Taxable Amount: After deducting the exempted ₹1.5 lakh from the investment, the taxable amount is ₹1.5 lakh.

4. Tax Calculation: Applying the LTCG tax rate of 10% on the remaining ₹50,000 (₹1.5 lakh - ₹1 lakh), the investor pays ₹5,000 as tax.

In this scenario, the investor owes ₹5,000 in taxes on the ₹3,00,000 ELSS investment.

How To Invest?

• Choose an ELSS fund based on their performance, return and lock-in period.

• Click on Invest and choose the amount and mode of investment (SIP or Lumpsum)

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