An Equity Linked Savings Scheme, shortly and popularly known as ELSS, is a tax-saving mutual funds offered in India. Notably, it is a combination of equity investment clubbed with tax deduction benefit.
One of the major reason for ELSS being most popular investment is that it is one and the only mutual fund investment which is eligible for tax deduction under section 80C of the Income Tax Act.
ELSS offers both the investment options i.e. a Systematic Investment Plan (SIP) and a lump sum investment. In the current article, let us figure out what is ELSS fund and how can one save tax by investing in ELSS.
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What is an ELSS Fund?
ELSS are type of mutual funds which invest major part of its corpus primarily in equity or equity related instruments. ELSS provides dual benefits i.e. tax savings along with wealth creation.
Important features of ELSS funds
- ELSS funds have a lock-in period of 3 years. Notably, the lock-in period of ELSS is the shortest one as compared to other investment options available for deduction u/s. 80C;
- There is no maximum limit prescribed for investment in ELSS i.e. investors can invest in ELSS without any upper limit;
- ELSS, being exposed to the equity market, has the potential to offer higher returns as compared to other tax savings options like the Public Provident Fund (PPF), National Pension Scheme (NPS), National Savings Certificate (NSC), etc.;
- ELSS also provides SIP options which enable small investors to invest in instalments.
How Can ELSS Fund Help You Save Tax?
As seen above, ELSS is most popular as the best tax saving option. Hence, let us figure-out, hereunder, how ELSS helps to save tax –
- Deduction under section 80C –
Investment in ELSS is available as a deduction under section 80C of the Income Tax Act. Thus, by availing of the deduction, one can easily save tax. Notably, the maximum deduction available u/s. 80C is INR 1.50 Lakhs and said deduction is available to the taxpayer opting under the old tax regime.
- Capital gain tax benefit –
ELSS has lock-in period of three years. Accordingly, Long Term Capital Gain @10% [@12.5% effective from 23rd July 2024] would be applicable on redemption of ELSS after mandatory period of three years.
Additionally, if the Long Term Capital Gain is up to INR 1 Lakhs [INR 1.25 Lakhs from Financial Year 2024-2025] the same will be exempt in terms of section 112A of the Income Tax Act.
Some of the Frequently Asked Questions with regard to the ELSS fund are highlighted hereunder –
1. How does ELSS help in tax-saving?
ELSS helps in tax-savings since investment in ELSS is eligible for deduction under section 80C of the Income Tax Act.
2. Is ELSS better than PPF?
ELSS investment is a bit risky as compared to PPF. However, ELSS is likely to offer higher returns as compared to PPF.
3. Can I withdraw money from ELSS after 3 years?
In ELSS there is a lock-in period of three years, hence after the completion of three years one can withdraw money from ELSS.
4. Does ELSS have a lock-in period?
Yes, ELSS has a lock-in period of 3 years.
5. Is ELSS taxable after 3 years?
Long Term Capital Gain at applicable rates will be chargeable on redemption of ELSS after 3 years.
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