Top 5 Myths about ELSS

The Income Tax Act 1961 allows for a tax benefit for investments up to Rs. 1.50 lakh u/s 80C to the taxpayers in a single financial year. This tax benefit may be availed by making certain eligible investments/ payments which include payment of life insurance premium, contribution into Employee Provident Fund (EPF), Public Provident Fund (PPF), 5-year tax saving fixed deposit, etc. Equity Linked Savings Schemes (ELSS) is also one of the available investment options and is emerging as a preferred choice for saving taxes, owing to its short lock-in period of 3 years and preferential tax treatment. However, considering its recent emergence as a tax saving product, there are many misconceptions prevalent in respect of ELSS. With this article, we aim to bust the top 5 ELSS myths.

Myth 1 - Investment in ELSS cannot exceed Rs. 1.50 lakh in a year

It is one of the most common ELSS misconceptions in the minds of investors. Considering its inherent advantage of providing market-linked returns, investors may like to save a higher amount in ELSS. However, since the tax benefit under Section 80C is limited to Rs. 1.50 lakh a year, it is often misconceived that the investment in ELSS must also not exceed that amount in a single financial year. Such restrictions are also seen in other eligible investment options like PPF, Sukanya Samridhhi Account, wherein the deposit itself is restricted to Rs. 1.50 lakh a year. 

Reality - there is no such restriction in case of ELSS, and the investors may invest any amount under ELSS in pursuance of their financial goals. However, the tax benefit will be equal to the actual amount invested subject to Rs. 1.50 lakh ceiling limit under Section 80C.

Myth 2 - ELSS Schemes get redeemed after three years

ELSS is a specified category of mutual funds, which carries a 3-year lock-in period. As such, it is often understood that the investment gets automatically redeemed at the end of the 3rd year, just like in case of other investment options u/s 80C like 5-year tax saving bank deposit, etc. 

Reality - It must be noted that the lock-in period is only a restriction to redeem the funds within the first three years and the investors are free to continue staying invested in such funds even after the expiry of the mandatory lock-in period. 

Myth 3 - Investment in ELSS must be made in a lump sum.

Taxpayers often believe that the investment in ELSS is open for a limited period and must be made in a lump sum to avail the tax saving benefit. 

Reality - ELSS offers one of the most convenient ways to save taxes, as one may start a SIP for an amount as low as Rs. Five hundred per month and as such, avail the benefits of spreading over the tax savings around the year. As such, instead of investing Rs. 1.50 lakh in a single time, the taxpayers may also choose to invest Rs. 12,500 per month from April and still avail the total tax benefit of Rs. 1.50 lakh.

Myth 4 - Lock-in Period starts from the date of registration of SIP in ELSS

A few of the available investment options like PPF, Sukanya Samridhhi Account, etc. start the lock-in period from the date of account opening. Similar misconception floats in the air in respect of ELSS, wherein the taxpayers consider that the lock-in period of 3 years starts right from the date of registration of SIP or more realistically, from the date of the first instalment deducted from a bank account. 

Reality - It needs to be understood that every SIP instalment is considered as a fresh purchase transaction, and accordingly, the lock-in period for each instalment will be three years from the date of the respective instalment. The investors must also take note of the fact that the lock-in period of 3 years is the lowest amongst all the eligible investment options. 

Myth 5 - You need a demat account to invest in ELSS.

As soon as people hear the word ‘equity’ in ‘Equity Linked Savings Schemes’, it is quite natural to believe that all the equity related procedures come into the picture. As such, the investors need a demat account to make transactions in ELSS. 

Reality – The taxpayers may invest in ELSS through physical/ online mode and holding mutual fund Units in demat mode is not mandatory, except for Exchange Traded Funds. The investor may choose to continue to invest in folio mode, wherein the redemption and switch transactions may be made through the fund house, instead of through stock exchanges. 

Tax Treatment for Equity Oriented Mutual Fund Schemes

The returns from mutual fund schemes are taxed as Capital Gains in the hands of investors. The gains from equity oriented mutual fund schemes are classified as short term capital gains if the investment in such funds has been for a period of less than 12 months. If the investments are held for more than 12 months, the gains will be taxed as long term capital gains. Short term capital gains are taxed at 15% (plus applicable cess and surcharge), whereas long term capital gains are tax at 10%.  Further, long term capital gains from equities and equity oriented mutual fund schemes are exempt up to Rs. 1 lakh a year. 

Disclaimers: 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.

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