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ELSS i.e. Equity Linked Savings Scheme is a type of mutual fund that qualifies for tax exemption under section 80 C and had a lock in period of 3 years. As the name suggests, the scheme invests majority of corpus in equity instruments.
Who should invest in ELSS?
ELSS is a good tax saving option for investors with high risk appetite, as the returns in ELSS are linked to the equity market. However, over a longer time horizon equity has a potential to generate attractive returns.
Options while making an investment in an ELSS:
An investor wishing to invest in an ELSS scheme can opt for either lump sum investment or systematic investment plan (SIP). SIP allows one to achieve tax saving in a systematic manner. Also an investor can choose to invest in the growth, dividend or dividend re-investment option. A growth option allows capital appreciation due to the compounding nature of investment while the dividend payout option provides liquidity. Post investment, one cannot change the investment option during the lock in period.
Benefits of investing in ELSS:
- Dual benefits- It provides dual benefit of equity investing along with tax savings.
- Tax free returns - Income/returns in form of Dividend or Capital Gains (on redemption) are totally tax free.
- Lower lock in period – In comparison to the various other investment avenues under section 80 C of the Income Tax Act, ELSS has the shortest lock in period.
The investor can avail the following tax benefit:
| Assuming investor falls in highest tax bracket | |
|---|---|
| Amount invested | 150,000 |
| Tax @30% | 45,000 |
| Cess @3% | 1,350 |
| Total Tax Benefit | 46,350 |
Investor will get a tax benefit of Rs. 46,350
*Assuming highest tax bracket i.e. tax rate of 30% which includes education cess of 2% and secondary and higher education cess @ 1%. Information on tax benefits are based on prevailing taxation laws. Kindly consult your tax advisor for actual tax implication before investment.