What Is ELSS Funds? 3 Things To Know Before Investing In an ELSS

mutual fund investment

ELSS or Equity-linked savings schemes are very popular these days. In fact, the entire Mutual Fund segment got a good promotion & awareness among people. But don’t just invest in ELSS blindly to save income tax.

Investing in ELSS need little more information, compared to other types of mutual funds. ELSS funds have different rules of investment and you must know before investing to save income taxes. This article will help you to understand such 3 crucial points about ELSS funds you must know before buying any ELSS mutual fund online.

What is ELSS Funds, Scheme?

An ELSS, or Equity Linked Saving Scheme, is a mutual fund scheme that is exempt from taxation under section 80 (C) of the Income Tax Act. This scheme invests in equities and therefore has the potential to earn significantly high returns when held for the long-term.

Essentially, investment in an ELSS offers two benefits:

  • potential for high returns over the long-term
  • lower taxation

So, here are a few things you need to remember before you invest in an ELSS:

Three-year lock-in period:

An ELSS has a lock-in period of three years which means that the investment made cannot be withdrawn before the end of three years since the time of investment. You may be apprehensive to lock your money in for that long, however, remember that this is the least lock-in period among all tax-saving products.

Public Provident Funds (PPFs) are locked in for 15 years while the National Pension Scheme is available only post-retirement with very stringent rules for withdrawal before that.

Tax benefits under section 80C

An ELSS will give you tax benefits as the investments in these schemes is exempt from tax as per section 80 (C). However, the tax benefit is applicable only for the year of investment and not for the subsequent years. But at the end of the three-year period, the same money could be re-invested in the ELSS fund to avail tax benefit for that year.

Eg: Assuming you invest Rs 1,50,000 as the initial investment in ELSS for tax benefits. Three-year returns of an ELSS typically could be 12% (depending on market conditions). So an investment of Rs 1.5 lakh could grow to Rs 2.1 lakh over a three-year period. So, at the end of the three-year period, the investor could re-invest Rs 1.5 lakh from the total amount received while pocketing about Rs 60,000 as returns.

Risk-Appetite:

An ELSS invests in equities and is therefore capable of generating returns which are much higher than that of the traditional products such as PPF, NPS, and the EPF. In case of PPF, NPS, and the EPF the capital will be protected but returns will be much lower compared to an ELSS. While there is some amount of risk in investing in equities, that risk gets adjusted when you hold on to the investment for a long time.

Equity investments over a long period of time, say 10 years, generally give returns in the 20-22% range. The potential for returns in equities is much higher compared to the more traditional products if the investment is held for a long time.

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