If you are looking to invest in the stock market and save taxes simultaneously, ELSS (Equity-Linked Savings Schemes) might be a suitable option for you. ELSS is a type of mutual fund that primarily invests in equities (stocks) and qualifies for tax benefits under Section 80C of the Income Tax Act.
With a three-year lock-in period, ELSS offers the potential for high returns along with tax savings, making it a popular choice for long-term investors.
How Do ELSS Funds Work?
ELSS funds pool money from investors to invest in a mix of stocks and other market instruments. These funds come with a mandatory three-year lock-in period, meaning the money invested cannot be withdrawn before three years from the investment date. This feature sets ELSS apart from other tax-saving options like PPF or NSC, which have longer lock-in periods.
Tax Benefits
The primary advantage of ELSS funds is the tax deduction they offer. You can claim deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act, thereby reducing your taxable income. This makes ELSS an attractive option for individuals looking to save on taxes while building wealth.
Tax Implications of ELSS
Long-Term Capital Gains (LTCG) are taxed only if gains exceed ₹1 lakh in a financial year, with the excess amount taxed at 12.5%.
Why Should You Invest in ELSS?
- High Return Potential: ELSS funds focus on equity investments, which historically offer higher returns compared to traditional tax-saving instruments like PPF or fixed deposits. However, these returns come with market risk.
- Shorter Lock-In: ELSS has a lock-in period of just three years, which is shorter than other tax-saving schemes.
- Diversification: ELSS funds invest across a range of stocks, reducing risk compared to investing in a single stock.
How Is ELSS Helpful for Salaried and New Investors?
- For Salaried Individuals: ELSS is an excellent option for salaried employees aiming to earn higher returns than EPF. It offers tax benefits under Section 80C and a shorter lock-in period of three years compared to ULIPs (five years) and the NPS (locked until retirement). This flexibility makes ELSS a rewarding choice for wealth creation and tax savings.
- For First-Time Investors: ELSS combines tax-saving benefits with exposure to equity markets, making it a great choice for beginners. Though equity investments can be volatile in the short term, the risks decrease over time. Investing in ELSS via SIPs helps first-time investors systematically invest and accumulate units, especially during market dips, potentially generating good returns over five years or more.
How to Invest in ELSS Funds?
To invest in ELSS funds, you can choose from different options. The growth option allows your investment to grow over time, with returns only realised when you redeem. This option does not provide dividends, but your investment’s value increases, subject to market risks. With the dividend option, you receive regular dividends, but they are taxable according to your income tax slab. Additionally, if your dividends exceed ₹5,000, a 10% TDS is applied. Another option is the dividend reinvestment plan, where dividends are reinvested into the fund, boosting your NAV, especially when the market is performing well.
‘While ELSS offers attractive returns, it is subject to market risks. Choose funds with a consistent performance history and ensure they align with your risk appetite’.
