What is ELSS: How can you Save Tax through ELSS Funds
An Equity Linked Savings Scheme (ELSS) is one of the most popular means to save tax in India. This is a kind of mutual fund that invests in stocks mostly (More than 65%). The largest benefit of ELSS is that it provides two advantages: you save tax under Section 80C of the Income Tax Act in Old Tax Regime, and your money stands a chance to grow with investment in the stock market.
Because it provides dual benefits of tax savings along with wealth creation, ELSS funds are very much in demand.
What Are ELSS Funds?
ELSS funds have to invest at least 65% of funds in equity and equity-related instruments, which give exposure to the stock market. This makes them capable of generating higher returns than other tax-saving instruments like the Public Provident Fund (PPF), National Pension Scheme (NPS), and National Savings Certificate (NSC).
Investors can opt for either of the two modes of investment:
- SIP (Systematic Investment Plan): Small and consistent investments over time are allowed.
- Lump Sum Investment: There is a facility for one-time, bigger investments. Usually when market is down, investors can take benefit by doing Lump Sum Investment.
Important Features of ELSS Funds that makes it more desirable than other Tax saving instruments:
1. Shortest Lock-in Period: The lock-in period of ELSS funds is three years, the shortest of all tax-saving options under Section 80C.
2. No Limit on Investment: Any amount can be invested in ELSS, but tax benefit under Section 80C is only Rs. 1.5 lakh a year.
3. Opportunity for Higher Returns: As the ELSS funds invest in the stock market, the fund is bound to give high returns; however, the risk due to fluctuations in the market is also there.
4. Save Tax and Build Wealth: ELSS helps you save tax by growing your money in the long term.
Ways Through Which ELSS Aids in Tax Saving
1. Section 80C Deduction: In the income tax returns, taxpayers can claim a deduction of up to Rs. 1.5 Lakhs in Old Tax Regime for their contribution towards Equity Linked Savings Scheme investments.
2. Long-term Capital Gains Tax Benefits:
- ELSS has a lock-in duration of three years. after 3 years, the units can be redeemed after paying capital gain tax in case of Long Term Capital Gains. For FY 2024-25, tax rate of 10% is applicable up to 22nd July and 12.5% tax is applicable from July 23, 2024.
- Capital gains of up to 1 lakh rupees are exempt from tax. From FY 2024-25, this limit has been increased to Rs. 1.25 Lakhs.
Queries Related To ELSS Funds
1. What is ELSS and how should one use it to save taxes?
Investments in ELSS funds qualify for a Section 80C deduction reducing overall income tax up to 1.5 lakhs.
2. Which is preferable PPF or ELSS?
With PPF, the risks are lower but the returns are limited, while ELSS has high potential returns but has a higher level of risk due to investment in the stock market.
3. After the elapse of a 3-year period can ELSS funds be redeemed?
The holding period of ELSS funds is at least three years during which investors can’t redeem their investment but after this period they can.
4. Does ELSS have a lock-in period?
Yes, ELSS has a lock-in period of three years. This is the shortest lock-in period compared to other tax-saving options under Section 80C.
5. Is ELSS tax-free after three years?
When you sell ELSS after three years, you have to pay Long Term Capital Gains tax. However, profits up to Rs 1 lakh (Rs. 1.25 lakh from FY 2024-2025) are completely tax-free.
ELSS funds are one of the good options for the taxpayer, as they not only save tax but also help create wealth by way of equity investments. Compared with other tax-saving options, a short lock-in period and investment avenues with a potential return set ELSS apart. However, investors should consider their risk-taking capability and investment objective before making this leap since ELSS is not free from market risks for the investor.
