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By BankBazaar. Sec 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain investments. This is an equity diversified fund and investors enjoy both the benefits of capital appreciation, as well as tax benefits. With the financial year coming to a close and sentiments towards equity markets turning positive, investments in ELSS are on the rise. An ELSS is a diversified equity mutual fund which has a majority of the corpus invested in equities.
Since it is an equity fund, returns from an ELSS fund reflect returns from the equity markets. This type of mutual fund has a lock in period of 3 years from the date of investment. This means if you start a Systematic Investment Plan in an ELSS, then each of your investments will be locked in for 3 years from the respective investment date. Investors can exit ELSS by selling it after 3 years. Similar to other equity funds, ELSS funds have both dividend and growth options.
Investors get a lump sum on the expiry of 3 years in growth schemes. On the other hand, in a dividend scheme, investors get a regular dividend income, whenever dividend is declared by the fund, even during the lock-in period. For tax purposes, returns from an ELSS scheme are tax free. You can claim upto Rs. Remember to do thorough research when you invest in an ELSS fund.
You must look at the long term performance of the fund before putting your money in it. While ELSS investment is locked in for 3 years, PPF investments are locked in for 15 years, NSC investments are locked in for 6 years, and bank fixed deposits eligible for tax deduction are locked in for 5 years. As ELSS is an investment in equity markets and investing in this for a long term can give you better returns compared to other asset classes over the long term.
You can also opt for SIP investments, which bring about discipline in regular investing. You can also get income from your investment amount in the lock in period if you opt for dividend schemes.
ELSS is not for risk averse investors. So you are better off avoiding ELSS if you do not wish to take this risk. Another disadvantage of ELSS is that you cannot withdraw your funds before the maturity date. Other instruments like PPF and bank deposits permit premature withdrawal, subject to certain conditions. But only the draft version of the DTC has been released. So it remains to be seen if the mutual fund industry can get the Government to include ELSS as a tax saving instrument in the final version of the DTC.
High inflows into ELSS funds are determined by the performance of the stock market in general. Also, if an investor gets better tax-adjusted returns from other investment avenues like debt, he will prefer to go for this, as risk is lower. But over a long term, ELSS funds are the best tax saving instruments; especially if you are an investor who can take on high risk. The success of this category of mutual fund depends on the tax treatment it receives under the DTC.
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Tax saving mutual funds: Equity Linked Savings Scheme
You are torn between the smartphone you have had your eye on and the newly launched high-fidelity headphones that you have just begun to covet. But as you are about reach a decision, your HR manager pops the question: Tax planning kiya kya? Most experts agree that among the several tax-saving options, equity linked savings schemes ELSS offer an excellent combination of shorter lock-ins, market-linked returns and greater flexibility, making it one of the top choices for investors. An ELSS is like any other mutual fund scheme that invests primarily in the stock market. The only difference is that an ELSS comes with a three-year lock-in, which means you cannot sell your investment before three years from the date of purchase. Which also means each instalment will have a different maturity date.
Why ELSS deserve your attention during tax season!