Equity Linked Savings Scheme (ELSS) is a popular tax-saving investment option for individuals in India. ELSS is a type of mutual fund that invests primarily in equity and equity-related instruments, providing investors with the potential for higher returns in the long run.
As the end of the financial year approaches, many of us rush to invest in tax-saving instruments to lower our tax liability. One such instrument that has gained popularity in recent years is the Equity Linked Savings Scheme (ELSS). In this blog post, we will delve deeper into what ELSS is, its benefits, and how it works.
What is equity linked savings scheme or ELSS?
ELSS is a type of mutual fund that invests primarily in equity and equity-related instruments. The primary objective of an ELSS is to generate long-term capital appreciation for investors, while also providing them with tax benefits under Section 80C of the Income Tax Act, 1961. ELSS funds have a lock-in period of three years, which means investors cannot redeem their units before the completion of three years.
Benefits of ELSS
Investing in Equity Linked Savings Scheme (ELSS) offers several benefits to investors. Below are the list of some of the benefits of ELSS :
- Tax Benefits: One of the primary benefits of investing in ELSS is that it provides tax benefits to investors. Investors can claim a tax deduction of up to Rs. 1.5 lakh in a financial year under Section 80C of the Income Tax Act, 1961.
- High Returns: ELSS funds invest primarily in equities, providing investors with the potential for higher returns in the long run. Historically, equities have generated higher returns than other asset classes such as fixed deposits, gold, and debt instruments.
- Professional Management: ELSS funds are actively managed by experienced fund managers who use their expertise to select the best stocks and construct a portfolio that can provide the best possible returns.
- Diversification: ELSS funds invest in a diversified portfolio of stocks, which helps in reducing the risk associated with investing in a single stock.
- Flexibility: Investors can invest in ELSS funds through a Systematic Investment Plan (SIP) or a lump sum. They can also switch from one ELSS fund to another if they are not satisfied with the performance of their current fund.
- Lock-In Period: ELSS funds have a lock-in period of three years, which helps in disciplining investors and preventing them from withdrawing their investments prematurely.
Overall, ELSS is an excellent investment option for those looking to save tax and generate higher returns in the long run while also enjoying the benefits of professional management and diversification.
How does ELSS work?
Equity Linked Savings Scheme (ELSS) is a type of mutual fund that invests primarily in equity and equity-related instruments. ELSS funds work by pooling money from several investors and investing them in a diversified portfolio of stocks. The portfolio is actively managed by experienced fund managers who use their expertise to select the best stocks and construct a portfolio that can provide the best possible returns.
ELSS funds have a lock-in period of three years, which means that investors cannot redeem their units before the completion of three years. This helps in disciplining investors and preventing them from withdrawing their investments prematurely. After the completion of the lock-in period, investors can redeem their units, and the proceeds will be taxed as long-term capital gains (LTCG).
Investing in ELSS funds also provides tax benefits to investors. Investors can claim a tax deduction of up to Rs. 1.5 lakh in a financial year under Section 80C of the Income Tax Act, 1961, by investing in ELSS. This makes ELSS an attractive investment option for those looking to save tax.
Investors can invest in ELSS funds through a Systematic Investment Plan (SIP) or a lump sum. SIPs allow investors to invest a fixed amount of money at regular intervals, such as monthly or quarterly. This helps in building a disciplined investment approach and helps in averaging out the cost of investment.
Overall, ELSS works by providing investors with the potential for higher returns in the long run while also offering tax benefits and the benefits of professional management and diversification. It is an excellent investment option for those looking to save tax and generate higher returns in the long run.
NPS or ELSS which is better?
NPS (National Pension System) and ELSS (Equity Linked Savings Scheme) are both popular investment options in India, but they differ in several ways.
NPS is a retirement-focused investment product that aims to provide a regular income stream to investors after their retirement. It is a long-term investment option that offers tax benefits to investors under Section 80C and Section 80CCD of the Income Tax Act, 1961. NPS investments are managed by professional fund managers appointed by the Pension Fund Regulatory and Development Authority (PFRDA). NPS also offers the option of choosing between various asset classes such as equities, debt, and government securities.
On the other hand, ELSS is a tax-saving investment option that primarily invests in equities and equity-related instruments. It offers tax benefits to investors under Section 80C of the Income Tax Act, 1961. ELSS funds are actively managed by experienced fund managers who use their expertise to select the best stocks and construct a portfolio that can provide the best possible returns.
When it comes to choosing between NPS and ELSS, both investment options have their pros and cons, and the choice depends on an individual’s financial goals, risk appetite, and investment horizon.
If an individual is looking for a retirement-focused investment option and is willing to invest for the long term, then NPS can be a good choice. NPS offers the option of choosing between various asset classes, which helps in diversifying the portfolio and reducing the risk associated with investing in a single asset class.
On the other hand, if an individual is looking for a tax-saving investment option that offers the potential for higher returns in the long run, then ELSS can be a good choice. ELSS funds invest primarily in equities, which have historically generated higher returns than other asset classes such as fixed deposits, gold, and debt instruments.
Overall, both NPS and ELSS are good investment options, and the choice depends on an individual’s financial goals, risk appetite, and investment horizon. It is always advisable to consult a financial advisor before making any investment decision.
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Frequently Asked Questions
Q1. What is Equity Linked Savings Scheme or ELSS?
A1. Equity Linked Savings Scheme is a type of mutual fund that invests primarily in equity and equity-related instruments. ELSS funds have a lock-in period of three years, and investors can claim tax benefits under Section 80C of the Income Tax Act, 1961.
Q2. How much tax deduction can one claim by investing in ELSS?
A2. An investor can claim a tax deduction of up to Rs. 1.5 lakh in a financial year under Section 80C of the Income Tax Act, 1961, by investing in ELSS.
Q3. What is the lock-in period for ELSS?
A3. The lock-in period for ELSS funds is three years. This means that investors cannot redeem their units before the completion of three years.
Q4. What is the minimum investment amount for ELSS?
A4. The minimum investment amount for ELSS varies from fund to fund. It can range from as low as Rs. 500 to as high as Rs. 5,000. Investors should check the minimum investment amount before investing.
Q5. Can one invest in ELSS through a Systematic Investment Plan (SIP)?
A5. Yes, investors can invest in ELSS funds through a systematic investment plan (SIP). SIPs allow investors to invest a fixed amount of money at regular intervals, such as monthly or quarterly.
Q6. How are ELSS funds taxed?
A6. ELSS funds have a lock-in period of three years, and after the completion of the lock-in period, investors can redeem their units, and the proceeds will be taxed as long-term capital gains (LTCG). Currently, LTCG on equity investments held for more than one year are taxed at 10% if gains exceed Rs. 1 lakh in a financial year.
Q7. Are ELSS funds risky?
A7. ELSS funds invest primarily in equities, which can be volatile in the short term. However, over the long term, equities have historically outperformed other asset classes such as fixed deposits, gold, and debt instruments. Therefore, investors should have a long-term investment horizon of at least five years and should be comfortable with market volatility.
Q8. Can one switch from one ELSS fund to another?
A8. Yes, investors can switch from one ELSS fund to another. However, switching may attract exit load and capital gains tax if the investment is redeemed before the completion of the lock-in period. Therefore, investors should carefully consider the pros and cons before switching.
Conclusion
ELSS is an excellent investment option for those looking to save tax and generate higher returns in the long run. However, investors should keep in mind that ELSS funds invest primarily in equities, which can be volatile in the short term. Therefore, investors should have a long-term investment horizon of at least five years and should be comfortable with market volatility. Investors should also choose ELSS funds based on their investment objective, risk profile, and performance track record.
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