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ELSS: Smart Way to Save Tax Research Team | Posted On Tuesday, October 01,2019, 07:25 PM

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ELSS: Smart Way to Save Tax



While tax planning may seem to be a difficult process, it is an important step to ensure minimum tax outgo. An ELSS scheme not only helps you reap the tax benefits but also provides the option to grow your money.

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How ELSS Works:

The equity-linked scheme popularly known as ELSS is a diversified equity fund that invests mainly in equity shares issued by companies. These funds are professionally managed by experienced fund managers and are offered by various fund houses.

The investments in ELSS are prone to market risk and the returns are dependent on the market movements. Thus the main objective of fund managers is to provide returns in line with the expectation of the investor and to shield the investment portfolio from market volatility.

Lock-in Period and Redemption:

These funds mainly invest in equity mutual funds and thus they come with a lock-in period of 3 years. This means that if you invest in ELSS plan today, then the money will be locked in of 3 years. You can only redeem your money after 3 years from the respective date of investment. On maturity, you may exit your scheme or reinvest your units.

Investment in is available in both the dividend and growth options.

The growth fund is an instrument that provides investors with a platform for long-term wealth creation. In the growth option, you will receive a lump sum amount when you redeem your units after 3 years. The investment comes back in the form of the invested amount plus capital appreciation.

Consequently, in the dividend option, you will get a regular dividend income, whenever the dividend is declared by the fund house. Investors will receive tax-free dividends. But as an investor, you are not guaranteed a dividend payment until the fund generates a profit. 

See Also: What is an Equity Linked Saving Scheme?

Tax Implications:

ELSS is an efficient way to save taxes when compared to other tax savings instruments under section 80C. The lock-in period of other tax-saving option is more than ELSS. You can enjoy a large array of tax benefits by investing in ELSS funds. According to experts, the ELSS funds are one of the best tax-saving options in India today. You can enjoy triple tax benefits namely tax deduction, tax exemption and benefit of indexation.

As you are already aware, the long-term capital gains from an ELSS scheme are fully tax exempted up to Rs. 1 lakh. Tax is levied at the rate of 10% for Long-term capital gains over Rs. 1 lakh. As per section 80C of the ITA, you can claim an income tax deduction of up to Rs. 1.5 lakh per year. ELSS funds help you to claim a tax deduction by deducting the amount of investment from the taxable income and reducing your tax liability. 

Risk Factors and Return Potential:

As the ELSS funds mainly invest in equities, the returns generated are much higher than other investment instruments with tax benefits in the long run. The ELSS funds come with dual benefit, firstly it helps you save taxes and secondly, it allows you to generate higher returns by investing in equities and professional management of funds.

There are apt investment options for investors with higher risk-taking ability. However, ELSS is a safer option compared to small and mid-cap funds. The ELSS funds offer significant returns as they carry a higher risk than debt funds.

A study of the ELSS indicates that it can generate returns at 12% over 10 years. So this can be a good way to generate wealth in the long run and achieve your financial goals. But the proper selection of funds is important to create wealth over the investment period. You must conduct thorough research of the market and specific funds before investing in such options.

See Also: Income Tax Return 2019: File Taxes for ELSS

How to Choose a Top-Performing ELSS:

Many investors use the ELSS funds as a safe way to start investing in mutual; funds. Gradually they progress to investing in equity mutual fund schemes. However, before investing in such options, it is beneficial to consider the various aspects of the fund.

If you want to start investing in ELSS consider analysing the fund history. Shortlist the funds that have a relatively longer fund history i.e. more than 5 years. Make sure the returns of the funds are due to the professional management of funds. Thereafter you can make your choice based on your investment goals. You can examine the fund’s expense ratio and check whether it is too high or not. Higher expense ratio will make your returns lower.

ELSS funds are a smart way to generate wealth in the loan-run. These funds provide great tax benefits to minimize your tax outgo. But it is important to understand that the returns are not guaranteed and so you must consult a financial adviser before parting with your money.

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