Equity Linked Savings Scheme (ELSS)
Definition:
An Equity Linked Savings Scheme (ELSS) is a type of Mutual Fund in India that primarily invests in Equity and Equity-Related Instruments.
It is unique because it offers Tax Benefits under Section 80C of the Income Tax Act, 1961. ELSS comes with a mandatory lock-in period of three years, making it the shortest among all Tax-saving Options.
ELSS is designed for individuals who want to invest in Equity Markets while also availing of tax deductions. These funds are diversified across various sectors and companies, allowing investors to potentially earn higher returns compared to traditional tax-saving instruments like Public Provident Fund (PPF) or National Savings Certificates (NSC).
Since ELSS primarily invests in Equities, the returns are market-linked and may vary based on Market Performance.
Key Features of ELSS include:
Tax Benefits: Under Section 80C of the Income Tax Act, investors can claim a deduction of up to ₹1.5 lakh from their taxable income by investing in ELSS. This deduction can significantly reduce the tax liability of individuals. This only applies for the Old Tax Regime.
Lock-In Period: ELSS comes with a compulsory lock-in period of three years, which means investors cannot redeem their funds before this period. This lock-in also allows the fund manager to make long-term investment decisions, potentially leading to better returns.
Equity Exposure: ELSS funds invest a significant portion of their Corpus in Equities, which provides exposure to the stock market. As a result, these funds tend to be volatile but can also offer higher returns over the long term.
Growth or Dividend Option: ELSS funds offer two types of Investment Options—Growth and Dividend. In the growth option, the returns are reinvested in the fund, while in the dividend option, the investor may receive payouts as dividends.
Risk and Returns: Since ELSS invests in the Stock market, it comes with a higher risk compared to fixed-income tax-saving instruments. However, the returns over the long term can be considerably higher, depending on Market Conditions.
Importance of ELSS
Wealth Creation: ELSS not only helps in saving taxes but also aids in wealth creation over the long term, thanks to its exposure to the Equity Markets.
Short Lock-In Period: Compared to other tax-saving instruments like PPF (15 years) or NSC (5 years), ELSS offers the shortest lock-in period of just three years. This gives investors Liquidity after a relatively short period.
Tax-Efficient Returns: The returns earned from ELSS are treated as Long-Term Capital Gains (LTCG). Up to ₹1 lakh of LTCG in a financial year is tax-free, and gains above ₹1 lakh are taxed at a rate of 10%, which makes it a Tax-Efficient Investment Option.
Ideal for Long-Term Investors: Since ELSS is an Equity-based product, it is suitable for individuals who have a long-term investment horizon and are looking to grow their wealth while saving on taxes.
Example
Consider an individual who invests ₹1.5 lakh in an ELSS fund.
This investment allows them to claim a tax deduction of ₹1.5 lakh under Section 80C, reducing their taxable income.
If the ELSS fund generates a return of 12% annually over three years, their investment grows to approximately ₹2.1 lakh after the lock-in period.
Additionally, they’ve saved on taxes for the Year of Investment.
FAQ's
What is the minimum and maximum investment limit in ELSS?
The minimum investment in ELSS can be as low as ₹500, while there is no upper limit on the maximum amount. However, only investments up to ₹1.5 lakh are eligible for tax deductions under Section 80C.
Can I withdraw my ELSS investment before the three-year lock-in period?
No, ELSS investments are locked in for a period of three years, and you cannot redeem your funds before the completion of this period.
How is ELSS different from other tax-saving options?
ELSS has a shorter lock-in period and offers higher potential returns compared to traditional options like PPF or NSC. However, it also carries higher risk due to its equity exposure.
Are ELSS returns guaranteed?
No, ELSS returns are market-linked and depend on the performance of the underlying equity investments. Therefore, they are not guaranteed and may fluctuate based on market conditions.
Can I invest in ELSS through a Systematic Investment Plan (SIP)?
Yes, you can invest in ELSS through SIP, which allows you to invest small amounts regularly instead of a Lump sum. Each SIP installment is subject to a three-year lock-in period.
Conclusion
Equity Linked Savings Scheme (ELSS) is a powerful Investment tool that combines the dual benefits of tax savings and Wealth Creation.
With its Equity exposure, short lock-in period, and tax-efficient returns, ELSS is a favored choice for individuals looking to grow their wealth while minimizing their tax liabilities.
While it carries inherent risks due to its market linkage, disciplined investing and a long-term horizon can help investors reap significant rewards.
