I have been suggested by colleagues at work to consider ELSS Funds for tax saving. Is it a good idea? What are the advantages of Equity-linked savings schemes?
Your colleague has given you good advice as Equity-linked saving schemes (ELSS) are diversified equity mutual funds offering tax savings under Section 80C of the income tax act. Before you get all ready to invest in ELSS, it is essential to know that they are equity funds and have a higher risk factor associated with them compared to other investment options like the PPF.
Being equity linked fund, there is however no guarantee of returns as returns mirror the stock markets although ELSS funds with good fund managers have made substantial gains in the past. On the positive side, ELSS funds have a three year lock in period which is amongst the shortest amid all tax saving instruments covered under section 80C. ELSS funds have both dividend and growth options making it ideal for investors with different financial plans.
ELSS are otherwise known as Equity Linked Saving Schemes. ELSS are a form of open ended Mutual Funds. The funds invested in by ELSS primarily revolve around equities and related equity products and these schemes usually come with lock-in periods of 3 years wherein the investors cannot access their funds. The tax benefits offered by Equity Linked Saving Schemes fall under section 80C of the Income Tax Act and offer tax exemptions of up to Rs 1.5 lakhs.
Features of ELSS
• If you can’t afford to put in large sums you can start investing in ELSS with just Rs. 500. There is no upper limit, unlike PPF and NSC.
• While there is no upper limit, only investments worth Rs. 1,50,000 will be eligible for tax benefits.
• Investments made in ELSS come with a lock in period of 3 years.
• These investments come with an inherent risk factor which can either be low, medium or high based on the investments made by the fund.
• Typically, ELSS are open-ended funds.
• These mutual funds also offer nomination facility.
• Many of the ELSS schemes will have entry and exit loads.
Benefits of Tax Saving Mutual Funds
• The first and most obvious benefit is that the investments are eligible for tax benefits up to Rs. 1.5 lakhs.
• The second benefit is that long term capital gains are not taxed.
• Investments in these funds can be made as a means to plan for future expenses like buying a car or paying the down payment for a house.
• These plans allow investors to invest on a monthly basis via SIP (Systematic Investment Plan) thereby negating the need to invest in one go.
• The fund portfolios are kept diverse so as to minimise the risk of massive losses.
• If you choose not to withdraw the investment, it will continue to grow.
• While you may not be able to withdraw the principal, you can withdraw the dividends earned, even during the lock-in period.
• Since these schemes are open ended, investments in them can be made all year round.
If the investment is being made in monthly instalments (SIP) then the lock-in period for each instalment is 3 years. For example, if the first investment was made on the 1st of Jan 2015 and the second one on 1st of February 2015 then on the 1st of January 2018 ONLY the first instalment will get unlocked. The second instalment will remain locked till the 1st of February 2018. To make withdrawals, you will need to know the number of available units and submit a claim form to the mutual fund provider. They will credit the amount to your account as soon as it is processed.
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