Tax planning is tedious but there’s a simple way to grow your money and enjoy tax benefits. Planning your finances involves planning taxes, and Section 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain instruments.
Equity Linked Savings Schemes or ELSS is a tax saving mutual fund and one of the most popular from Section 80C investment options. ELSS is an equity-diversified fund.
Wait. That sounded like Greek to me!
What is an equity-diversified mutual fund?
It’s a mutual fund that invests primarily in the equity markets or stock markets across various sectors and companies. ELSS funds allow you to enjoy both high returns and tax savings.
Why an ELSS?
- ELSS funds have a lock in period of only 3 years, the shortest among all Section 80C investment options This means once you start a systematic investment plan or SIP in an ELSS then each of the regular investments you are contributing to the fund will be “locked in” for three years from the investment date. During this lock-in period you can’t withdraw any money. This is a benefit of ELSS because in most other investment options, the lock in period is at least 5 years
- ELSS ensures that at least 65% of the total funds are invested into equity, which can help grow your profits much faster than regular funds
- ELSS is an open-ended mutual fund which means that it does not have restrictions on the amount of shares the fund will issue
- Investments in ELSS funds exempt from Tax Deduction under sec 80C up to Rs. 1.5 lakhs
An ELSS fund has two options: dividend and growth. A dividend is a distribution of a portion of a company's profits. If you opt for the dividend pay-out option, then you get a regular dividend income during the fund’s lock-in period whenever a dividend is declared by the fund.
If you choose the growth option, you will get a lump sum amount when the fund expires in three years.
A word of caution
Remember to do your research before you put your money in an ELSS fund. Look at the long-term performance as well as the fund details. If you’re an investor with a high-risk appetite, then ELSS funds are the best tax saving instruments over a long period. Also, premature withdrawal of funds from an ELSS is not possible.
Good tax management can go a long way towards increasing your returns. Exit from an ELSS fund when the market is rallying so you can enjoy a good profit. If this means hanging onto the fund for a few more years then do so.
Know what your financial goals are, and what your risk appetite is before investing in an ELSS fund.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.