ELSS funds are equity funds that invest a major portion of their corpus into equity or equity-related instruments. ELSS funds are also called tax saving schemes since they offer tax exemption of up to Rs 150,000 from your annual taxable income under Section 80C of the Income Tax Act under the old tax regime.
An ELSS fund is an equity-oriented scheme with a mandatory lock-in period of three years. In recent years, many taxpayers have turned to ELSS schemes to avail of tax benefits.
If you invest in ELSS schemes, then you can avail tax exemption of the invested amount up to a limit of Rs 150,000. Further, the income that you earn under this scheme at the end of the three-year tenure will be considered as Long Term Capital Gain (LTCG) and will be taxed at 10% (if the income is above Rs 1 lakh).
Now that the tax season is here, Section 80C remains a popular tax-saving tool in the hands of the taxpayer for those who opt for the old tax regime and the ELSS is a popular choice. All tax-saving instruments under section 80C of the Income Tax Act have a certain number of years in lock-in. As compared to any of these options, ELSS has the shortest lock-in period and the potential for higher returns in the long term.
” If you invest Rs 1.5 lakh in an ELSS fund in the financial year and fall under the highest tax bracket ( Rs 10 lakh and above), you can save Rs 46,800 in taxes,” said Value Research in a note.
Why ELSS?
Should you invest through SIP or lumpsum?
What about the lock-in?
The lock-in period for ELSS funds lasts for three years from the date of your investment. To find out when it ends, simply add 3 years to the date you invested. If you invest through SIP, consider each instalment as a separate investment with its own lock-in period from the date of SIP registration itself. As such, each SIP instalment is considered as a separate lumpsum investment for purpose of lock-in period.
The lock-in period provides you additional tax benefits on the return earned due to the lock-in. The question of short-term capital gains also gets eliminated, and you will only be paying long-term capital gains tax at 10% on the gains exceeding Rs. 1 lakh overall at the time of redemption. Tax-saving benefits are only available if you opt for the old tax regime. No tax benefit is available under the new tax regime for any investment instruments.
How to pick the right ELSS fund?
“One may look at various factors including consistency in outperforming benchmark, Risk ratios, fund manager track record, AUM Size etc to select a fund. Allocate the maximum possible amount allowed in the category for tax saving. Invest for the long term and don’t hurry to redeem the fund after lock-in of 3 years is over. Review the fund performance after lock-in period is over and stay invested at least 5-10 years or even more if all parameters are okay. Invest regularly through SIP /STP and use any substantial downside in the market to add a lump sum,” said Mukesh Kochar, national head, Wealth, AUM Capital.
There are two major mistakes an investor should avoid to get the maximum benefits of a tax-saving ELSS fund:
The first mistake is to approach this investment only as a tax-saving investment: Tax efficiency should be a subset of your goal planning. “The ideal way would be to identify your important financial goals and then, depending upon tax saving requirements, some of the investments can be channelized towards a tax saving fund. This would allow you to not only meet your long-term goals but additionally also give you taxation efficiency for the financial year,” said Harsh Gahlaut, Co-founder & CEO, FinEdge.
First Published: Feb 28 2024 | 9:37 AM IST