Best Tax Saving Investment in India

Equity Linked Saving Scheme (ELSS) Mutual Funds

Equity Linked Saving Scheme (ELSS) is a type of mutual fund that primarily invests in equity and equity-related instruments. It is one of the most popular tax-saving investment options in India. ELSS funds offer the dual benefits of capital appreciation and tax benefits under Section 80C of the Income Tax Act.

Features of Equity Linked Savings Scheme Mutual Funds

1. Equity Exposure: ELSS funds invest at least 80% of their assets in equities.
2. Lock-in Period: They come with a minimum lock-in period of 3 years.
3. Tax Benefits: Investments in ELSS are eligible for tax deduction under section 80C, up to Rs 1.5 lakh.
4. Market-Linked Returns: ELSS funds offer market-linked returns.
5. Diversified Portfolio: ELSS funds typically invest in diverse equities from various sectors.
6. No Maximum Investment Limit: There is no upper limit on the amount that can be invested in ELSS.
7. Minimum Investment: The minimum investment amount is as low as ₹500.
8. SIP Option: ELSS funds allow investors to start investing in it with a Systematic Investment Plan (SIP).
9. Potential for High Returns: ELSS funds have the potential to offer higher returns compared to other tax-saving options.
10. Tax on Long Term Capital Gains (LTCG): Gains above ₹ 1,00,000 from the sale of ELSS funds are taxable at the rate of 10%.

Benefits of ELSS Mutual Fund

Equity Linked Saving Scheme (ELSS) offers several benefits:

1. Tax Savings: Amount invested in an ELSS fund is available for a tax deduction to the extent of ₹150,000 for the current financial year under section 80C of the Income Tax Act. This is the only scheme that allows investors to save on tax while earning high returns from investment in equity funds.
2. Lowest Lock-in Period: ELSS has a lock-in period of only 3 years, as compared to a minimum of 5 years for other tax-saving options. This period is the lowest in comparison to other tax saving options such as 15 years in a PPF or 5 years in a Fixed Deposit option.
3. Lower Tax on Gains: An ELSS fund is invested for a minimum period of 3 years. Any gains from the sale of ELSS funds are, therefore, long-term in nature. According to the present law, gains above ₹ 1,00,000 shall be taxable at the rate of 10%. In contrast, short-term capital gains are taxed at the rate of 15%.
4. The Benefit of Compounding: It is generally advised to invest in equity funds for a long time horizon, spanning 5-10 years. ELSS funds, by virtue of the lock-in period, bring about a disciplined long-term investment by default. In this process, it helps the investors benefit from the power of compounding in the long run.
5. Redemption Not Compulsory After 3 Years: If the investors are happy with the returns from the respective ELSS fund, they may choose to continue. Redemption is not compulsory after a period of 3 years.
6. Higher Returns: Since ELSS funds invest in equity schemes, the returns are higher (15-20%) compared to other tax saving options (generally, 7-10%). Over a 3-year period, the benefit of compounding coupled with returns from equity provides higher returns for investors.
7. SIP Option Available: While investing in ELSS, investors may choose to go with the SIP option. It allows the investor to invest a fixed amount at regular/ periodic intervals.
8. Safe and Transparent: Investing in mutual funds is very transparent. All mutual funds companies come under the purview of SEBI, and they need to make necessary disclosures.

Things to Consider Before Investing in ELSS Mutual Funds

1. Risk and Volatility: ELSS funds invest primarily in equities, which are subject to market fluctuations and volatility.
2. Investment Horizon: Due to their mandatory three-year lock-in period, ELSS funds are best suited for long-term investment goals.
3. Tax Benefits: Tax deductions are available for ELSS funds under Section 80C of the Indian Income Tax Act, up to a maximum of Rs. 1.5 lakhs per financial year.
4. SIP Investment: A SIP investment is an option available in ELSS funds that allow investors to invest a fixed amount at regular intervals.
5. Fund Performance and Track Record: It is crucial to check its past performance and analyze the historical performance of ELSS funds before investing.
6. Fund Manager Expertise: The experience and track record of the fund manager can significantly impact the fund’s performance.
7. Diversification: ELSS funds typically invest in diverse equities from various sectors. This helps in decreasing concentration risks.
8. Exit Load: Some ELSS funds may impose an exit load if investors redeem the units before a certain period.
9. Regulatory Oversight: All mutual funds, including ELSS, are regulated by the Securities and Exchange Board of India (SEBI), ensuring transparency and investor protection.
10. Financial Goals: Your investment in ELSS should align with your long-term financial goals.

Who Should Invest in ELSS Mutual Funds?

Equity Linked Saving Scheme (ELSS) Mutual Funds can be a suitable investment option for a variety of investors:

1. Salaried Individuals: If you are a salaried employee, you would likely be contributing towards the Employees’ Provident Fund (EPF), which is a fixed-income product. ELSS funds can provide a good balance to your portfolio by adding an equity component.
2. First-time Investors: If you are a new investor, ELSS is an ideal choice, since, in addition to tax benefits, you get a flavor of equity investing and mutual funds.
3. Long-term Investors: ELSS funds are a good option for investors with a long-term investment horizon looking to seek exposure to the stock markets and save taxes.
4. Tax Savers: Any individual or Hindu Undivided Family (HUF) looking to save up to Rs 46,800 a year on taxes can consider investing in ELSS. However, these funds are suitable only for those who are willing to take some risk and can stay invested for at least the mandatory lock-in period of three years.
5. High-risk Appetite Individuals: ELSS investments can offer the dual benefits of tax savings and capital appreciation. Thus, they can be suitable for individuals who have a high-risk appetite and a long-term investment horizon.

How to Invest in ELSS Mutual Funds

1. Choose an Investment Platform: You can invest in ELSS funds through online mutual fund investment platforms, or through an existing demat account. Some banks also offer online investment services.
2. Complete Your KYC: Know Your Customer (KYC) is a one-time process necessary for investing in mutual funds. If you’re investing through an app or online platform, the process is usually digital and quick.
3. Choose the ELSS Fund: Once your KYC is done, you can choose the ELSS fund you want to invest in. There are over two dozen funds in the ELSS category for your consideration.
4. Decide on Investment Mode: You can invest either as a lump sum or via the Systematic Investment Plan (SIP) route. SIP ensures regularity and discipline and reduces the risk to capital.
5. Invest: You can invest as little as INR 500 in an ELSS fund. While you can claim tax benefit only up to INR 1.5 lakh, you are free to invest as much as you like.
6. Track Your Investment: Most platforms allow you to track your fund and portfolio performance on an everyday basis.

How to Choose a Good ELSS Fund

Choosing a good Equity Linked Saving Scheme (ELSS) fund involves considering several factors:

1. Past Returns: Look at the fund’s past performance. However, remember that past performance is not indicative of future returns.
2. Fund Manager Experience: The experience and track record of the fund manager can significantly impact the fund’s performance.
3. Investment Style: Different ELSS funds have different investing styles and asset compositions. Make sure the fund’s investment style aligns with your risk tolerance and investment goals.
4. Expense Ratio: This is the annual fee that all funds charge their investors. It is important to compare the expense ratio of different funds.
5. Asset Composition: The fund manager of an ELSS fund allocates at least 80% of the fund’s assets in equity and equity-related instruments. The remaining portion can be invested in fixed-income or money market instruments based on the scheme.
6. Diversification: It is also essential to diversify your investments and allocate your assets appropriately.
7. Investment Through SIP: A Systematic Investment Plan (SIP) is a way to invest small amounts in mutual funds regularly. It allows you to benefit from Rupee Cost Averaging to bring down the average cost of purchase of the mutual fund units

Disadvantages of ELSS Fund

Equity Linked Saving Scheme (ELSS) is a popular tax-saving investment option in India. However, like all investment options, it has its disadvantages:

1. Market Risk: ELSS funds are subject to market risks as they are directly linked to the equity market. Equity-related investments are more prone to market volatility.
2. No Guaranteed Returns: Unlike other tax-saving schemes such as fixed deposit or Public Provident Fund (PPF), ELSS does not provide guaranteed returns. The returns are dependent on the performance of the equity market.
3. Lock-in Period: ELSS funds come with a lock-in period of three years. This means you cannot withdraw your investment before the end of this period.
4. Limited Tax Benefits: The tax benefits for a particular financial year are available only to the tune of ₹150,000 under section 80C, irrespective of the total amount of investment in an ELSS fund.
5. Tax on Long Term Capital Gains (LTCG): Gains above ₹ 1,00,000 from the sale of ELSS funds are taxable at the rate of 10%

A Comparison of ELSS with Other Popular Tax-Saving Investments in India

Frequently Asked Questions About Equity Linked Saving Scheme (ELSS) Mutual Funds

1. What is ELSS?
   • ELSS or Equity Linked Saving Scheme funds are tax-saving mutual funds, in which the majority of the funds are invested in equity schemes.
2. How much tax can be saved by investing in ELSS?
   • As per the Income tax rules, investments in Equity Linked Savings Scheme are eligible for tax deduction under Section 80C. You can claim a deduction of up to Rs 1.5 lakh for investment in Equity Linked Savings Scheme and save tax up to Rs 46,800.
3. Should my first mutual fund investment be in ELSS?
   • If you are a new investor, ELSS is an ideal choice, since, in addition to tax benefits, you get a flavor of equity investing and mutual funds.
4. How long should I stay invested in ELSS?
   • ELSS funds come with a lock-in period of three years. However, you can choose to stay invested for a longer period depending on your financial goals.
5. In ELSS, do SIPs give better returns than lump sum investments?
   • Both SIP and lump sum investments have their own advantages. SIPs can be beneficial in averaging out the cost of investment over a period of time.
6. Do taxes apply to returns on ELSS?
   • Yes, Long Term Capital Gains (LTCG) above ₹1 lakh from ELSS funds are taxable at 10%.
7. Is it mandatory to stay invested or withdraw funds even after the expiry of the lock-in period?
   • No, it’s not mandatory to withdraw your investment after the lock-in period. You can choose to stay invested if you are happy with the returns.
8. Why do authorities impose a lock-in period on ELSS?
   • Authorities impose the lock-in period to ensure that investors remain invested for a minimum period, allowing their investments to grow.
9. Do I need to invest in a lump sum for an ELSS fund?
   • No, you can choose to invest either as a lump sum or via the Systematic Investment Plan (SIP) route.
10. How do I redeem my ELSS before 3 years?
    • ELSS funds come with a lock-in period of three years, so you cannot redeem your investment before the end of this period.