An individual or HUF can get tax exemption on the savings and their investments up to a maximum of INR 1,50,000 per annum. ELSS and various other investments are eligible for tax exemption under Section 80C of Income Tax Act, 1961.
Equity Linked Savings Scheme is kind of mutual funds that invest majorly in equity and equity-related securities. ELSS funds are approved for tax savings under Section 80C. Most of the tax savings investments have a lock-in period of 5 years, wherein you cannot withdraw funds in between. ELSS funds also has a lock-in period of three years which means you cannot withdraw the amount in between three years. These funds get matured at the end of three years of their investment date.
For example, you invest your savings in ELSS on 1 April 2017, you can withdraw the entire funds only on or after 2 April 2020. In case you stay invested beyond lock-in period i.e. more than three years, there are chances of gaining handsome returns on ELSS investments.
ELSS funds normally attract higher returns when the stock market is on the boom. Equally, these funds carry all those risks which are linked to investments in equity.
Not only investments in ELSS, but also the returns received during the maturity (dividend) or at the time of maturity of the plan (Capital gains) is not taxable. The reason behind it is the three year lock-in period and there aren’t the long-term capital benefits on equity investments. Any equity investment, which is for more than one year is tax-free.
There are two options for ELSS funds, growth option and dividend option.
ELSS funds provide all the above-listed benefits to an investor. However, these schemes are still facing hostility in the Indian investment market. The main reason behind it is growing inflation which is resulting in lower returns. People are hesitant to invest in ELSS since there is an investment risk associated with it if an investor fails to understand the volatility. As an investor, if you are afraid of savings in Equity Funds, you should rather opt for other tax savings investments over Equity Linked Savings Scheme. On the other hand, senior citizens or retired people who seek long-term investment schemes should try and avoid ELSS investments as a tax saving instrument.
ELSS fund is nothing but a type of mutual fund. There isn’t any major difference between investment in ELSS funds and investment in typical mutual funds. The only difference is the three-year lock-in period in ELSS fund.
Under ELSS investment scheme, an investor has to stay invested for the lock-in period, i.e. three years. Such investments cannot be liquidated prior to its maturity at the end of 3 years.
In case the main purpose behind investment isn’t tax benefit, an investor should prefer Equity Funds instead of ELSS funds which can be redeemed at any time since there is no clause related to lock-in period.
Steps to invest in ELSS funds comprise of:
However, it is duly recommended to opt for an intermediary who eases your process and helps in managing your mutual funds. Here, you do not need to pay any commission to them since they are getting paid from the investment company they deal with.
Once you are sure how to invest in ELSS funds, the final stage in the investment procedure is to exercise the right option for you. You need to know which ELSS funds the best suit your requirements.
The advantage of a lump sum becomes prominent at times of a big market downfall in a bull market phase. An investor is aware of the market going to recover but when the fall happens, he is placed with an opportunity to buy Mutual Fund at an attractive NAV. So investing in one go will be beneficial here.
Rohan invested a lump sum of Rs. 10 lacs in a fixed deposit for a period of 5 years at the rate of 8% p.a. At the end of 5 years, he got Rs. 14.70 lacs. On the other hand, Sohan grabbed an opportunity to invest a recurring deposit that offered 9% p.a. He invested a sum of Rs. 2 lac per year for a period of 5 years. Although the rate of return was higher, he ended up with Rs. 11.96 lacs.
Looking at ROI, Sohan got higher benefit whereas Rohan ended up with more money.
Whether SIP is better or Lumpsum is better is based on the time of entry in the market (bull market/ bear market), availability of funds, market trend, volatility in the market, etc. To get the most out of a Mutual fund, you can combine both SIP and Lumpsum in a way that will yield more profits to you.