An Equity Linked Savings Scheme (ELSS) is a popular tax-saving mutual fund in India. It uniquely combines equity investments with tax deduction benefits, making it a favored choice among investors. ELSS is the only mutual fund investment eligible for tax deductions under Section 80C of the Income Tax Act. It offers flexibility in investment methods, allowing both Systematic Investment Plans (SIPs) and lump sum contributions. Let’s dive deeper into ELSS funds and explore how they can help you save taxes.
ELSS funds primarily invest a significant portion of their corpus in equity or equity-related instruments. They provide a dual advantage: tax savings and wealth creation. Below are the key features of ELSS funds:
Lock-in Period: ELSS investments come with a mandatory lock-in period of three years, which is the shortest among tax-saving instruments under Section 80C.
No Maximum Investment Limit: While there is no upper limit for investing in ELSS, the tax deduction under Section 80C is capped at ₹1.5 lakh per financial year.
Higher Returns Potential: Being equity-focused, ELSS funds have the potential to generate higher returns compared to other tax-saving options like Public Provident Fund (PPF), National Pension Scheme (NPS), and National Savings Certificate (NSC).
SIP and Lump Sum Options: ELSS offers flexibility for investors. SIPs allow small, regular investments, making it an accessible option for those with limited funds.
ELSS is a sought-after tax-saving tool due to its multiple benefits. Here’s how it helps:
Tax Deduction Under Section 80C:
Investments in ELSS qualify for tax deductions under Section 80C of the Income Tax Act.
Taxpayers opting for the old tax regime can claim a deduction of up to ₹1.5 lakh per financial year, thereby reducing taxable income.
Capital Gains Tax Benefits:
ELSS investments have a three-year lock-in period, after which redemption is subject to Long-Term Capital Gains (LTCG) tax.
LTCG up to ₹1 lakh (₹1.25 lakh from FY 2024-25) is exempt under Section 112A of the Income Tax Act.
Gains exceeding the exempt limit are taxed at 10% (12.5% effective from July 23, 2024).
By investing in ELSS, you can claim a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act, making it an efficient way to reduce taxable income.
While ELSS involves higher risk due to its market exposure, it also offers the potential for greater returns compared to the safer but lower-yielding PPF.
ELSS investments are locked for a minimum of three years, after which you can redeem your funds.
Yes, ELSS requires a three-year lock-in period, promoting a disciplined approach to investing.
Yes, gains from ELSS investments are subject to LTCG tax at applicable rates once the three-year lock-in period ends.
ELSS funds stand out as a unique investment option offering the twin benefits of wealth creation and tax savings. With a short lock-in period, no upper investment limit, and the potential for high returns, ELSS is an excellent choice for individuals seeking tax-efficient equity exposure. However, being market-linked, these funds involve a degree of risk, and it is advisable to align investments with your risk appetite and financial goals.
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