ELSS: A Wealth Creation & Tax Saving Tool
By Akhil Chugh
Date July 24, 2021
While there are multiple tax saving options available in India, ELSS or Equity Linked Savings Scheme has become the most popular as:
- ELSS provides higher returns compared to PPF, Tax Saving Bank FDs etc
- ELSS has the shortest lock-in period of 3 years amongst other traditional tax saving options.
Let’s understand what are ELSS Mutual Funds and how investing in ELSS provides the dual benefits of wealth creation & tax saving.
What are ELSS Funds:
ELSS funds are the tax-saving mutual funds that invest the major portion of the investment corpus in equity and equity-related instruments.
ELSS funds are also called tax-saving schemes as they offer tax exemption of up to Rs 1.5 lakh from your annual taxable income under Section 80C of the Income Tax Act.
Benefits of ELSS:
1. Shortest Lock-in period:
Compared to other popular tax saving options like Tax Saving FD or PPF, ELSS Mutual Funds have the shortest lock-in period of three years only.
2. Inculcates Financial Discipline:
There are two modes of investing in ELSS – Lumpsum or Systematic Investment Plan (SIP). SIP enables you to invest a predetermined amount at regular frequencies regardless of the market condition to accumulate the desired corpus over a longer time frame. This periodic mode of investment inculcates the habit of saving & investing on a regular basis. In addition, SIP provides the benefits of compounding along with rupee cost averaging to beat market volatility.
3. Wealth Creation Tool:
Equities as an asset class beats fixed income instruments and inflation by a wide margin over the long term. As ELSS Mutual Funds invest 80% of their corpus in equities, they have the potential to deliver high inflation-beating returns. Individuals aiming to achieve long-term financial goals (buying a dream home, children’s education, their wedding expenses, retirement needs, etc.) and have a longer investment time horizon may consider ELSS funds for tax-saving and wealth creation.
4. Tax-saving potential:
ELSS provides tax benefits under Section 80C of the Income Tax Act up to Rs. 1.5 Lakh every year. You need to calculate the amount you would be investing in ELSS funds along with other options like FD, NPS, PPF, EPF, NCS, ULIP, etc. if any because you cannot exceed the total amount of Rs 1.5 lakh to claim for tax exemption under Section 80C.
Note: The gains you make from equities if redeemed after 1 year of investment are considered as long-term capital gains (LTCG). LTCG on equities of up to Rs 1 lakh in a financial year is tax-free, whereas LTCG exceeding Rs 1 lakh in a financial year is taxable @ 10%.
Illustration:
- Yash has a taxable income of INR 12 lakh. This puts him in the 30% tax bracket. He decides to invest INR 1.5 lakh in an ELSS fund. This reduces his taxable income to INR 10.5 lakh.
- Yash earns a capital gain of INR 1,10,000 on redemption of ELSS. This attracts a 10% tax on the INR 10,000 while the remaining INR 1 lakh remains exempt. Tax payable will be INR 1,000 (plus cess).
Why ELSS is Better than Other Tax-Free Investment Options?
Although the ELSS gives the dual benefit of tax saving and wealth creation but the risk associated with ELSS is high and should not be overlooked. Investors with a moderate risk-appetite and investment horizon of at least 7 years should consider investing in it to get inflation-beating returns.
Past SIP Performance of Top ELSS Funds
Based on the last 10-year SIP performance of ELSS funds, Net Brokers have collated a list of best tax-saving mutual funds to invest in 2021:
How You can get a Tax Benefit of up to ₹46800 from ELSS:
A taxpayer can claim up to ₹1,50,000 tax benefit under section 80C of the Income Tax Act, 1961, which leads upto Rs 46,800 in Tax Savings as shown in the below table:
As the return from ELSS is considered as Long-Term Capital Gain, the capital gain from ELSS will be taxed at 10%. If the capital gain is under ₹1 lakh then it is completely exempted from tax.
Net Brokers Takeaways
- Net Brokers believes that ELSS is one of the best tax-saving tools available to an investor to get the twin benefit of tax savings and an opportunity to harness the potential upside of investing in the equity market.
- One should carefully scrutinize various ELSS schemes before making investments. Gauge your risk appetite and the time horizon for which you can stay invested to choose the fund that best suits your investment goals.
- Taxation plays an integral role in overall financial planning; hence Net Brokers strongly suggest investors plan their investments in ELSS systematically at the starting of the year and not towards the end of the fiscal. One can start looking at investing in an ELSS scheme through SIP to benefit from rupee cost averaging to beat market volatility and avail tax benefit up to Rs.1.5 lakhs for a year as per the current tax laws.
- Equity markets can be volatile in the short term and therefore, investors should be patient and have a sufficiently long investment horizon for Equity Linked Savings Schemes (ELSS). Though the lock-in period for ELSS investments is 3 years, an investor should be willing to stay invested for a minimum horizon of 7-10 years to earn higher returns.
Equity Linked Savings Schemes are one of the best Section 80C investment options to avail tax deduction. Invest smart with Net Brokers Mutual Fund App in the right ELSS fund and start a monthly SIP in an ELSS fund to get triple benefits – tax savings, systematic investing, and an opportunity to harness the potential upside of investing in the equity market.
For more information, get in touch with us today! Download our mutual fund app & start investing in an ELSS fund to save tax and grow your capital significantly over the long term.
Happy investing!