ELSS: All you need to know.
ELSS refers to Equity Linked Savings Scheme, which allows individuals to redeem upto Rs. 1.5 lacs of their total income tax under the section 80C of Income Tax Act of 1961. It means that if you would like to invest Rs. 50000 in ELSS, then this amount will be deducted from their taxable income, reducing their tax burden by that amount. Although they come with a lock in period, these units can be redeemed after the period.
Advantages of ELSS Mutual Funds
- Shortest lock-in period: ELSS comes with the shortest lock-in period of 3 years. Unlike other tax saving fixed deposits that have 5 year lock-in period, ELSS offer higher liquidity in the medium term. PPF, which is another deposit scheme, has 15 year maturity. Therefore, in comparison, ELSS is a better platform.
- Higher returns: ELSS, owing to its market linked return, offers higher return possibility as opposed to other 80C investments like PPF and FDs. In medium to long term plans, ELSS has a higher possibility of giving better returns.
- Improved post-tax returns: Long term capital gains from ELSS are tax free upto a limit of one lakh. This also means that any gains over one lakh comes at a rate of 10% only. Higher returns when combined with lower tax rates ensure that the investor receives maximum post tax returns.
- Easy to manage: With the help of a monthly SIP, one can easily invest in ELSS. This also means that your investment will be regular and managed more effectively.
Tax implications on ELSS
Income tax calculation on the ELSS is very similar to other equity instruments. Short Term Capital Gains (STCG) attracts a tax of 15% and Long Term Capital Gains (LTCG) attracts 10% tax on amounts above one lakh.
How to invest in ELSS
Growth option: While considering the growth option, one must be aware of the fact that benefits can only be accessed after the end of lock-in. This also means that one will not receive benefits in the form of dividends. The fact that an investor can redeem their benefits only after the maturity ensures that they appreciate the NAV, which translates to higher profits. Apart from this, the benefits are subject to market risks.
Dividend option: In this option, the investor receives benefits in the form of dividends. It means that one gets the excessive profits that are over and above in the form of dividends, which are completely tax free. A certain periodicity can be expected here.
Dividend reinvestment: This is a preferred option when the market witnesses an upswing and is likely to continue in the same manner of a while. Here, the investor reinvestment dividend received and adds it to the NAV.