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Reading: Why Invest in ELSS for Tax Saving – Here’s Complete Guide
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Investment Simplified > Mutual Funds > Why Invest in ELSS for Tax Saving – Here’s Complete Guide
Mutual Funds

Why Invest in ELSS for Tax Saving – Here’s Complete Guide

Lakshey Bahl
Lakshey Bahl May 1, 2022 10 Min Read
Updated 2022/06/30 at 10:49 AM
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Imagine living in a country where you get to keep all your hard-earned money and pay no taxes. Sounds good, right? But we all know that it does not happen in real life. The truth of the matter is—It is impossible for a government to run the country without collecting taxes.

Contents
A Quick Overview of ELSSTop Reasons to Invest in ELSSFAQs

But what if we told you that there exists an investment option that accumulates wealth over time while helping you save on taxes? Are you surprised? You probably are. One can invest in ELSS or Equity Linked Saving Schemes to qualify for tax deductions and build a significant corpus in the long run.

If you think that a significant part of your income is being charged as taxes, it is time you do something about it. ELSS investment can be a great way to avail of tax benefits. In this article, we will talk about the reasons to invest in ELSS, how to invest, and mistakes to avoid.

Key Takeaways

  • ELSS is a type of mutual fund that primarily invests in equities and equity-related products.
  • ELSS is the only mutual fund that qualifies for tax deductions under section 80C of the IT Act.
  • ELSS offers dual benefits—reasonable returns and tax savings.
  • There are broadly two ways to make ELSS investment—SIP and Lumpsum.
  • ELSS investments can be made through both online and offline modes.

A Quick Overview of ELSS

You don’t pay taxes; they take taxes. That is why working out a strategy to avoid taxes is important. With ELSS investment, you can minimize your tax amount. Equity Linked Saving Scheme or ELSS is a type of mutual fund that primarily invests in equities and equity-related products. They are a specific category of mutual funds that qualify for tax deductions under section 80C of the Income Tax Act of India, 1961. This is the reason why ELSS is popularly known as tax saving mutual fund.

ELSS offers dual benefits—reasonable returns and tax savings. Most of the scheme’s assets are invested in equities. This means that the returns earned are directly linked to the stock market’s performance. This is a suitable financial instrument that can help fulfil long-term goals such as retirement planning or buying a new house.

It is possible to avail of tax deductions on the investments up to Rs. 1.5 lakh every year. These funds have a mandatory lock-in period of 3 years and aim to maximize capital appreciation over time. The fund managers pick the stock after conducting in-depth research and analysis to deliver optimal portfolio returns

Top Reasons to Invest in ELSS

Investing in mutual funds is a great way to make gains from the stock market and grow your money in the long run. You may get confused while choosing the right fund. But is there a fund that can provide more than just achieving the financial goals? Yes. We call it ELSS funds.

The answer to the question of whether you should invest in ELSS is a no brainer. The answer is YES, in case you didn’t get it. Now to make you more confident to invest in ELSS, here are some of the key reasons: –

  1. Save Taxes While Creating Wealth

The very first thing to keep in mind is that ELSS are equity mutual funds. When you invest in ELSS, your money is invested in companies of all sizes—large, mid, and small. ELSS has the potential to create enough wealth to fufil long-term financial objectives. The other big benefit is that you can claim up to Rs. 1.5 lakh tax deduction every year. No other mutual fund offers this benefit. 

  1. Short Lock-in Period

Compare the lock-in period of ELSS with other tax-saving investment alternatives. The result? ELSS wins again. The lock-in period of some popular tax-saving instruments are—PPF- 15 years, NSC – 5 or 10 years, tax-saving FD – 5 years. At the same time, ELSS has a lock-in period of only 3 years. 

  1. Start Small

It is easy to invest in ELSS, just like any other mutual fund. If you choose to invest in ELSS mutual funds through SIP (Systematic Investment Plan), you can start with an investment of as low as Rs. 500. And with the increase in your income, you can easily increase your investment amount through SIP top-up.

  1. Mutual Funds Taxation Helps Save More

We have already discussed that ELSS has a lock-in period of 3 years. And after this period, the gains of up to Rs. 1 lakh are tax exempt. However, gains above Rs. 1 lakh are taxed at 10%. Some people may tell you that benefit of ELSS investment is less compared to options such as PPF. Don’t listen to them. PPF has a very long lock-in period than ELSS. If you do the math, you will understand that ELSS offers greater benefits. 

Investing in ELSS – Mistakes to Avoid

Equity Linked Saving Schemes or ELSS funds invest your money in equities to deliver capital appreciation. It not only provides tax savings but also helps achieve long-term financial goals. But things may go wrong when you invest in ELSS if you do not know what not to do. So, here are some of the common mistakes you should avoid in order to maximize your returns: –

  1. Investing at the Last Moment

When it comes to investments, the decisions must be well thought out. Delaying at the last moment to invest in ELSS may not give you enough time to develop a sufficient corpus to achieve your financial objectives.

  1. Making Too Many Investments

If you make too many investments in ELSS funds, monitoring your portfolio can get difficult. Keep in mind that it is not possible to exit these investments before the completion of the lock-in period.

  1. Redeeming Immediately After Lock-in Period

When you invest in ELSS, it is essential that you remain invested in equity products for a minimum of five to seven years. Avoid redeeming ELSS investments immediately after the end of the lock-in period. It will help maximize your returns. The power of compounding and rupee cost averaging will deliver higher returns in the long run.

  1. Investing Only to Save Tax

ELSS investments are a great way save on taxes. However, you first need to analyze various options while keeping in mind the factors such as risk, lock-in period, and returns. Taking a well-informed decision when you invest in ELSS is crucial.

Did You Know?

ELSS funds fared better in 2021 when compared to the BSE 200’s performance, returning 29.11%, with only 26.83% of funds underperforming the benchmark.  

Online or Offline – How to Invest in ELSS?

Now that we understand ELSS and how it works, let us now focus on how to invest in ELSS online or offline. There are broadly two ways to make ELSS investment—SIP and Lumpsum. 

With SIPs, you get the opportunity to invest a fixed amount at regular intervals. On the other hand, you need to make a one-time payment in case of Lumpsum. Investing via SIP can be helpful if you do not have a large sum of money to invest. In contrast, lumpsum investment can lead to higher long-term returns.

ELSS investments can be made through both online and offline modes. However, they involve different procedures for the submission of documents. You can invest through either mode at your convenience.

Offline Mode – For people who do not have sufficient knowledge about ELSS funds, investing through an offline agent can be a good idea. However, it may incur some extra charges. If you wish to invest in ELSS independently in offline mode, you can visit the nearest branch of the AMC (Asset Management Company). Do not forget the following documents: –

  • Identity Proof
  • A cancelled cheque
  • Passport size photographs
  • PAN card
  • KYC documents
  • NACH mandate and cancelled cheque

Online Mode – In case you do not want to add any commissions or brokerage related expenses, you can visit your preferred online investment platform. There are various online tools available to understand and compare different schemes in one place. Here are some pre-requisites when you invest in ELSS online: –

  • Aadhaar based e-KYC
  • Completion of registration through a trusted channel.

Word to Remember

Rupee Cost Averaging

It is a strategy where you purchase more units when the NAV of the fund is low, and lesser units when the NAV is high. This basically averages out the purchasing costs over the SIP investment tenure.

Conclusion

Ever heard of the phrase—‘Buy one, get one free’? ELSS offers just that in the world of investment. You not only get the advantage of building a large corpus over time but also save the tax amount applied to your hard-earned income. Therefore, the question of whether you should invest in ELSS is trivial. We have covered what ELSS is how it works, and how to invest in it. This should give you enough confidence to start your ELSS investment journey.

Invest in ELSS today to enjoy the tax benefits as well as long term capital appreciation!

FAQs

What are ELSS funds?

ELSS are tax saving funds, where most of the invested amount is put into equities. It qualifies for tax deductions under section 80C of the IT Act.

What is the lock-in period for the ELSS?

ELSS mutual funds have a mandatory lock-in period of 3 years.

Who should invest in ELSS?

Every individual who wants to save tax under section 80C and has adequate risk tolerance to overcome the short term volatility of equity markets should invest in ELSS.

What is the maximum tax benefit that can be availed under ELSS funds?

Under section 80C of the IT Act, one can avail of tax deductions of up to Rs. 1.5 lakh per year. 

Why should I invest in ELSS mutual funds?

If you invest in ELSS, you open yourself to avail great benefits as ELSS has the potential to provide high returns.

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