Equity Linked Savings Schemes (ELSS) are investment instruments that allow investors to avail tax benefits of up to ₹1.50 lakhs from the total gross income under Section 80C of the Income Tax Act 1961. Owing to its inherent benefits of the lowest lock-in period of three years amongst all the eligible investment options and the potential of higher returns, ELSS tax saving has been gaining immense popularity. However, recently, it has been observed that they resort to tax-saving investments at the end of the financial year. Even ELSS mutual funds get a significant share of its net inflows during the last quarter and especially the last month.

The table below shows that over the previous two years, more than 20% of the net inflows come only in March:

Source: Association of Mutual Funds in India (AMFI), www.amfiindia.com

However, instead of considering tax savings at the year-end, it is advisable to focus on saving taxes all through the year. Making lump sum investments to avail tax deduction may stress the cash flows during that period for the taxpayers, and as such, the taxpayers may spread the tax-saving investments across the year. Just like the investment options available with other mutual fund schemes, the investors may also register a Systematic Investment Plan (SIP) in ELSS funds to make monthly investments in ELSS for tax saving efforts.

Benefits of Investing in ELSS through SIP

Here are the benefits of investing in ELSS through SIP across the year:

1. Prudent Tax Planning

Section 80C of the Income Tax Act provides a deduction of up to ₹1.50 lakhs in a fiscal year. If you are planning for tax savings at year-end, you may want to skip investing to avoid stressing the cash flows with lumpsum investments and instead pay tax. Alternatively, you may opt to register a monthly SIP of ₹12,500 in ELSS funds (or any amount as low as ₹100, and even higher amounts than the prescribed tax deduction limit) and aim to utilise the entire tax benefit, eventually saving tax on the invested amount up to ₹1.50 lakh in a year.

2. Aligning Tax Savings with Financial Goals

If you stay financially disciplined and make regular investments through SIP, the financial planning objectives may be met effortlessly. Further, deciding to invest in ELSS through SIP may help you align your financial goals with your investments. So, while you might have been saving for existing goals through other investments, you may choose to replace those investments with ELSS. This helps you achieve the dual benefits of tax savings and investing for your financial goals concurrently. However, one must take care that such financial goals must have a time horizon of more than three years, as ELSS comes with a lock-in period of three years from the date of investment and hence, may not be redeemed before that in any circumstances.

3. Taking Informed Decisions

When you are planning to start tax investments across the year, you have the liberty of time to analyse various investment options to save tax. As such, one may appreciate the ELSS tax saving benefits in a better manner, and thus take a well-considered and thought-out decision about investing in ELSS through SIP.

With the special tax rates of 10% on gains from ELSS investments* (with an exemption up to ₹1 lakh for gains from equity shares and equity-oriented funds taken together in a year), ELSS funds deserve a due consideration for wealth creation needs of the taxpayer as well, instead of being just a tax- saving option.

4. Investing Becomes Affordable

Investing in SIP plan in ELSS mutual fund makes it affordable to invest as it allows investors to pay the amount of their choice on a weekly, monthly, or quarterly basis. Thus, for example, an investor can invest ₹500-1000 on a monthly basis and can increase the amount on a future date.

* The tax benefits as mentioned in the article are updated for the latest Union Budget presented i.e. Finance (No. 2) Act, 2019. However, the tax treatment will be as applicable on the redemption date.

Disclaimers:

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2017. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.

UTI AMC Ltd is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (acting through UTI Trustee Company Pvt. Ltd) accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services.