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ELSS Taxation - How ELSS Funds are Taxed?

Getting started with ELSS Fund

Investors from around the world look for new investment opportunities that can help increase their wealth, generate valuable returns, and reduce their tax liabilities. Today, several investment choices allow decent returns, but the gains are taxable as per the applicable tax laws. But, other investment schemes offer the dual benefits of returns as well as tax-saving. One such investment scheme is the Equity Linked Savings Scheme or ELSS.


What are the ELSS funds?

ELSS funds, as the name itself suggests are equity funds that invest a significant portion of a corpus in equities and equity-related instruments. These funds, which are also known as ‘tax-saving’ funds, have a unique distinction of having a lock-in period of just three years, which is shortest among all tax-saving investments in India.


ELSS Taxation

ELSS funds are the only type of funds that give investor tax benefit under Section 80C of the Indian Income Tax Act, 1961. Owing to the tax deduction advantage, it is one of the most preferred investments in India; several investors have ELSS in their portfolio. ELSS mutual funds taxation falls under Section 80C, and the maximum benefit you can get is Rs. 1.5 lakhs.

If you remain invested for three years, the returns earned from your investment will be considered as Long-Term Capital Gains (LTCG), and it is taxable at 10% if the income earned is more than Rs. 1 lakh.

Features of ELSS

  • Fund managers invest at least 80% of the investment corpus in equity and equity-related instruments.

  • The fund invests the corpus in a diversified manner to spread the risk and provide valuable returns to the investors in the long run

  • There is no upper limit on the investment tenure; you can stay invested for as long as you want.

  • The minimum lock-in period is three years. It is advisable to remain invested until the end of the lock-in period to take advantage of the tax on ELSS funds. Post the lock-in period; the returns are considered LTCG.

  • For the amount, you invest in ELSS funds; you can get exemption under Section 80C.

Why should you invest in ELSS funds?

Apart from high market-linked returns and ELSS taxation, ELSS investments offer several benefits.

Although you can invest a lump sum amount in an ELSS scheme, a lot of investors prefer the SIP mode. The SIP or Systematic Investment Plan allows you to invest a small amount at regular intervals and build a considerable corpus over the years.

  • Diverse Portfolio

    One of the most significant advantages of ELSS investment is that it invests in a diverse group of companies across different sectors and size (from large-cap companies to small-cap). This not only gives investors have a diversified portfolio, but all mitigate the risk.

  • Low-cost investment

    Unlike a lot of other investment schemes that require you to invest a lumpsum amount, ELSS is one of the low-cost investments. You can start investing in ELSS with as low as Rs. 500. This ensures that you start investing early and get the benefit of time to allow your money to grow in the long run. Also, investing a small amount regularly inculcates financial discipline.

  • SIP

    Although you can invest a lump sum amount in an ELSS scheme, a lot of investors prefer the SIP mode. The SIP or Systematic Investment Plan allows you to invest a small amount at regular intervals and build a considerable corpus over the years.

Factors to Consider While Investing in ELSS

Just like any other investment that offers market-linked returns, ELSS also has a certain element of risk. And, therefore, it is paramount to make an informed investment decision. If you wish to invest in ELSS, you must review the past performance of the scheme’s performance, and consider the below factors:

  • Tax savings + Investment

    Since ELSS is the only mutual fund that invests in the equity market and offers a tax deduction, several investors tend to look at ELSS only as a tax saving instrument. But, if you are looking to invest only to reduce your tax liability, there are other options under Section 80C. So, before you invest in ELSS funds, you must ensure to have a clear investment plan to achieve your goal, and you will automatically get a tax benefit. You can use ELSS fund returns to accomplish your long-term goals.

  • Lumpsum investment or SIP

    Several investors include ELSS in their portfolio only as a last-minute attempt to avail tax benefits. And, often tend to commit a lump sum investment in the market. But, such decision can be risky, primarily if you invest when the market is high. The key to getting valuable returns from ELSS is to remain invested for a long-term. Several experts suggest that the best to invest in ELSS funds is through SIP.

  • Investment tenure

    Many young and amateur investors tend to prefer investing in ELSS than other long-term investment options like PPF or bank fixed deposit mainly because it has a short lock-in period. But this can be a counterproductive strategy as the investments in the equity market take about 5-7 years to stabilise and provide decent returns. So, since it has an inherently volatile investment scheme, it is better to stay invested over a long-term about 7-10 years.

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