Equity-linked savings schemes (ELSS) are basically diversified equity mutual funds with a major portion of corpus invested into equity-related instruments. Under Section 80C of the Income Tax Act, 1961, the amount invested in ELSS qualifies for a deduction of up to Rs 1.5 lakh per year. The money invested in ELSS has a lock-in period of 3 years. Below, we have outlined some of the primary benefits of investing in ELSS mutual funds:
Benefits of investing in ELSS mutual funds
- By investing in Equity Linked Saving Schemes (ELSS), you can save taxes on your income from salary, business, or real-estate.
- While investing in ELSS, you can opt for either a dividend or a growth option. If you are looking for a regular income, it is advisable to go ahead with the dividend option. On the other hand, if you are looking to make a long-term investment, growth option would be more suitable.
- However, the dividends in case of an Equity Linked Saving Schemes (ELSS) are subject to a dividend distribution tax of 10 %. Thus, choosing the growth option over the dividend option will yield tax-effective returns.
- ELSS schemes allow you to invest systematically even with a small amount. Your savings turn into your investments, and this inculcates a habit of continuous investing. As there is a lock-in period of 3 years, if you start an SIP in ELSS, the returns for your SIP will be generated every month after 3 years of the first investment. Moreover, the returns will be exempted from taxes if they are under Rs 1 lakh in a year.
- Even though the lock in period for ELSS is 3 years, you can allow the continuous growth of your fund for a longer period or redeem after 3 years. Since ELSS funds invest your money in equity, there are chances of higher returns with tax benefits.
- Diversification is yet another benefit of investing in ELSS. Since these funds invest across various companies ranging from small-cap to large-cap and across various sectors, it helps you to add diversification to your investment portfolio.
How to invest in ELSS mutual funds?
- To invest in an ELSS mutual fund, you must be KYC compliant. You can invest in ELSS funds in the same way that you invest in any mutual fund. You can invest either as a lump sum or via the SIP route. Investing through SIP reduces the risk to capital and also makes the investor financially disciplined.
- You can also invest in ELSS by visiting the fund house’s branch office or the registrar office with a duly filled physical form along with a cheque.
- Once the investment is made, a folio number is allotted to the investor. Future investments in the ELSS equity funds can be made with the help of the same folio number of the same mutual fund
Before beginning your investment journey with ELSS funds, it’s essential that you are well aware of its nuances. This will help you make better decisions regarding your investment.
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