Investors look for investment possibilities to get consistent returns, build wealth over the long term, and reduce taxes. Although many investment opportunities result in earnings, they are taxed by Income Tax regulations.
An investor can properly save on income taxes by making investments in well-known tax-saving securities. The Equity Linked Savings Scheme, also known as ELSS funds, is one of the best tax-saving options.
What are ELSS Mutual Funds?
Under Section 80C of the Income Tax Act of 1961, an individual or HUF may deduct up to Rs. 1.5 lacs from their total income by investing in an equity-linked savings scheme (ELSS).
As a result, if an individual invested Rs. 50,000 in an ELSS, her total taxable income would be reduced, lowering her tax liability.
The lock-in period for these programs is three years from the date of unit allocation. The units can be redeemed or swapped after the lock-in period has ended. ELSS provides dividend and growth alternatives. Systematic Investment Plans (SIP) are another avenue for investors, and contributions up to 1.5 lakh made in a fiscal year are eligible for tax exemption.
Features of ELSS Funds
Lowest Lock-in Period: When it comes to tax-saving investments, equity-linked savings schemes have the shortest lock-in Period. After a three-year lock-in period, the assets may be revised. ELSS funds may provide a greater return than public provident funds, traditional tax-saving fixed deposits, national pension plans, and others.
Save Tax: Under section 80C of the Act, investments in ELSS funds offer a tax benefit of up to 1.5 lakh. It enables tax savings and higher earnings. Utilizing tax deductions aids you in planning your taxable income.
Investment method: SIP or lump sum investments are both acceptable for ELSS. Rupee cost averaging is available while investing in SIP mode, saving the hassle of making a single large investment. As a result, investing in the SIP method does not feel expensive.
Management of the invested sum: ELSS are managed by experts familiar with market circumstances and aware of market ups and downs. These fund managers are in charge of overseeing all investments made through ELSS.
Tax Treatment In ELSS Funds
One of the most often used strategies for tax planning is equity-linked savings schemes, or ELSS funds, which are mutual funds that save on taxes. Because the returns are based on stock market performance, these funds may produce higher returns than other tax-saving instruments. The majority of ELSS funds’ corpus is typically invested in equity.
Under Section 80C of the Income Tax Act of 1961, you are eligible for an income deduction for ELSS of up to Rs. 1.5 lakh in a fiscal year. This results in tax savings of Rs. 46,800 if you are in the highest income category.
Reasons to invest in ELSS Funds
Pay less and get more
You can claim a deduction and lower your taxable income by up to Rs. 1,50,000 annually under Section 80C of the IT Act.
Trading without money
ELSS investments have the shortest lock-in period of Section 80C investments, at just three years.
Convert into delivery
If you fall under the highest tax bracket and fully utilise Section 80C provisions, investing in ELSS Mutual Funds will help you save up to Rs. 46,800 annually.
Investors must evaluate the long-term profits of various schemes before investing because ELSS investments are for the long term. All ELSS plans devote at least 65% of their funds to equity funds and the remaining portion to debt. A decent strategy for choosing an ELSS scheme is to consider the scheme’s historical performance over a five to ten-year period, the consistency of the fund and company, and how long the fund manager has been managing the fund.
Make sure the scheme’s portfolio includes a variety of large, mid, and small-cap stocks since this will allow it to provide positive returns over different market cycles. Plans that invest in various companies and industries are also better able to endure any cyclical market turbulence. For returns greater than any other tax-saving investment strategy, investors must hold their investments for at least five to seven years.