Tax Planning with ELSS Funds
By Akhil Chugh
Date September 10th, 2023
Tax planning plays a pivotal role in the overall success of your financial strategy. Numerous income tax-saving avenues are available to safeguard your earnings, with ELSS (Equity Linked Saving Schemes), insurance policies, and PPF (Public Provident Fund) ranking among the most favored choices. ELSS funds distinguish themselves from conventional options due to their superior tax efficiency, shorter lock-in period, and stronger potential for long-term wealth accumulation.
Let’s understand what are ELSS Mutual Funds and how investing in ELSS provides dual benefit 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. The fund manager based on his experience and knowledge picks securities of companies which have a strong growth potential and a resilient business model.
ELSS funds offers a convenient way to avail tax advantage coupled with its ability to generate higher returns by harnessing the potential of the equity markets.
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.
Key Things to Know Before Investing in ELSS Funds
If you are considering investing in ELSS funds, there are several important factors to understand before making your investment decision. In this blog, we will delve into the key things you should know before venturing into ELSS investments.
1. Shortest Lock-in Period:
ELSSs have the shortest lock-in period among tax-saving investments. Most other investment options under the 80C basket are government-backed investments. They typically come with longer lock-in periods.
ELSS funds offer a convenient way to avail tax advantage coupled with its ability to generate higher returns by harnessing the potential of the equity markets.
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.
However, you must decide on the investment amount, if you have invested in other tax-saving instruments under Section 80C. Invest in ELSS only if it matches your risk profile.
Also remember, in order to make the most out of ELSS investment, it is important to be patient and keep the fund invested for a longer time period.
2. Moderately high risk in nature:
ELSS funds, being an equity-oriented scheme, invest mostly in equity and equity-related securities. Equity funds carry a higher risk of fluctuation in Net Asset Value (NAV) as they are exposed to market volatility. Owing to this, ELSS funds may seem a risky proposition to some investors. However, this should not deter you from taking the benefit of such investments.
The trick here is to stay invested for a longer investment horizon. As compared to other asset classes, equity funds have been found to give above-average returns in the long run.
3. Gateway to equity investing:
ELSS is an equity-diversified mutual fund that invests primarily in stocks. It is an ideal way of investing in the stock market as you enjoy the benefits of diversification, professional management and tax saving!
Consider an investment in ELSS through a systematic investment plan or SIP. You can invest even Rs 500 a month, without timing the market. The slow and steady approach of investing through SIP imparts financial discipline.
Net Brokers believe that it is the ideal investment to get into the world of equity mutual fund schemes. Since these schemes come with a mandatory lock-in period of three years, investors would get used to the volatility typically associated with the stock market. Thus, giving them more confidence to start investing in other schemes.
4. Maximum Tax exemptions limits:
Under Section 80C, there is a limit to the amount of Rs 1.5 lakhs that you can claim for a tax deduction in a year. Another important point to keep in mind is that this deduction of Rs.1.5 lakhs is inclusive of other tax-saving investment options covered under Section 80C of the Income Tax Act. If you have investments in PPF for a sum of say, Rs 50,000, then the exemption on your ELSS funds would be Rs.1,00,000 only. So, do the calculations before finalizing your investment amount. Remember, if you invest more than the required amount in ELSS, you won’t be able to claim an extra deduction under Section 80C.
5. Availability of SIP option:
Avoid last-minute hasty investments, and start investing for saving tax and other financial goals at the beginning of the financial year. Choose the Systematic Investment Plan (SIP) for regular investments in equities for greater compounding benefits over an extended period. SIP allows you to invest a fixed amount regularly, which can help in rupee cost averaging and mitigate the impact of market volatility.
6. Avoid investing in too many ELSS funds:
It’s tempting for investors to invest in a new fund each year and then end up with 7-8 funds in their portfolio. Multiple investments are tough to track. This leads to portfolio over-diversification which may hurt your returns over the long term. Not only that, but having too many ELSS funds will also make it difficult for you to track their performance diligently and leave you with no control over your investments. Ideally one should have around 1-2 top-performing ELSS funds in their portfolio. You should then track their performance periodically.
Net Brokers Takeaways:
- Net Brokers believe 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.
- Don’t invest only to save tax on your investment. Like in all mutual fund categories, there are various ELSS funds with varying degrees of track record, investment style, etc. Select an ELSS fund with a history of steady performance and a robust portfolio to take advantage of potential growth opportunities while enjoying tax savings.
- Taxation plays an integral role in overall financial planning; hence Net Brokers strongly suggest investors plan their investments in ELSS systematically at the start 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 benefits 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 deductions. Invest smart with the Net Brokers Mutual Fund App in the right ELSS fund and start a monthly SIP 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.
