Tax deductions and wealth building over time are two advantages of investing in ELSS mutual funds. The shortest lock-in period of all tax-saving investments is three years, and ELSS mutual funds have the potential to deliver a huge yield among 80C choices.
What are ELSS funds?
Equity Linked Savings Scheme, also known as ELSS, is a mutual fund exempt from taxes under Section 80C of the Income Tax Act of 1961. An equity-focused fund with a 3-year lock-in period is called ELSS. They are closely related to the stock market’s performance and are more commonly referred to as tax-saving mutual funds.
Benefits of ELSS funds
Shortest
Compared to other Section 80C tax-saving instruments, ELSS has the lowest lock-in period—3 years—as opposed to tax-saving FDs, which have a 5-year lock-in, and PPF, which have a 15-year maturity. Consequently, ELSS gives you more freedom over the next few years.
Large potential returns
Returns from ELSS mutual funds are much higher than those from other tax-saving instruments because they invest in equity markets.
Favourable post-tax returns
Long-term capital gains from ELSS mutual funds up to Rs. 1 lakh per year are exempt from income tax, while payments over Rs. 1 lakh are subject to a 10% tax.
Enables one to accumulate money
You can use the ELSS investment corpus to achieve your financial objectives. You can coordinate your ELSS investments to help you reach goals at various phases of your life, such as saving for retirement, a child’s education, a car, or a down payment on a home.
Tax benefits of ELSS Funds
All of the advantages above of participating in a mutual fund are provided by the equity-linked savings scheme (ELSS), with the additional benefit of yearly tax savings. Here is a quick rundown of their salient characteristics:
- SEBI mandates that 80% or more of an ELSS fund’s assets be invested in equity shares and other capital products.
- As a result, such funds have a relatively high-risk exposure because market volatility has an immediate and big influence on them.
- On the other hand, larger market upswings and bullish runs may also produce more rewards than different types of investment strategies.
- To withdraw your money from an ELSS fund, you must wait until the required 3-year lock-in period has passed. However, there is no maximum time limit; you can continue investing for as long as you like.
Risks of ELSS
Market risks are present in all mutual funds, particularly equity funds and ELSS. Because they invest in market-linked assets and depend on the performance of financial funds, these funds do not provide guaranteed returns. Long-term investments can overcome market volatility and provide investors with favourable returns.
Growth And Dividend Options For ELSS Funds
You, as an investor, have the choice of dividend or growth possibilities. For as many years as you invested in ELSS, you can earn a consistent income from the latter through dividend payouts. There is no dividend advantage if you choose the growth option because the dividends are invested in the fund to purchase units and allow the capital to expand. When dividends are reinvested, the NAV of the units rises, which multiplies the investor’s earnings, mainly when the markets are strong.
Bottom Line
ELSS is a mutual fund that invests in stocks and provides both corpus growth and tax savings. Investors in ELSS should do so if they want to lower their tax obligations while enjoying strong capital growth.
The best return-giving potential of all tax-saving plans under Section 80C is free and has the shortest lock-in duration. To participate in ELSS, investors must have a high tolerance for risk because these funds are primarily focused on equity-related assets, which are very volatile in the mark
