How To Save Tax Through ELSS Mutual Funds

Published On: 15-Mar-2021
Benjamin Franklin once said, “there is nothing certain in this world, except death and taxes.” While the taxes may take away a pie of your income, the Income-tax laws provide for various exemptions and deductions to help you plan your taxes in a better manner, and in the process, save taxes. Section 80C is one of the most commonly known tax benefits amongst the taxpayers. This section allows the taxpayers to lower the taxable income up to Rs. 1.50 lakh in a year for making certain tax-saving payments and investments. Equity Linked Savings Scheme (ELSS) is one of the eligible investment options under Section 80C of the Income Tax Act, 1961.  Any amount invested over and above the available 80C limit may not provide you with the tax benefit, but will still be subject to the restrictive lock-in period under ELSS. 
ELSS invests at least 80% of their net assets in equity and equity related instruments. ELSS has a lock-in period of three years. However, the attached tax benefit may compensate the investors for the restrictive covenant in respect of the lock-in period.
As per the prevailing Income-tax laws, the point of taxation for calculating capital gains on mutual funds is the time of redemption. The unrealised gains on mutual funds are not taxed on accrual stage, until the investor has realised such profits. 
Since the investors must compulsorily stay invested in ELSS funds for at least three years, the capital gains are considered as long term, as the specified period for classification of capital gains from equity-oriented mutual funds as long term is 12 months or more. As such, when the investor redeems the ELSS investments, he/ she is liable to pay tax at a rate of 10% without the benefit of indexation. This rate is also one of the lowest amongst other investment options. Such gains are further eligible for the overall tax exemption of upto Rs. 1 lakh a year, which is available for all long-term capital gains on equity shares and equity-oriented mutual fund schemes during the year. 
As such, through ELSS, the investors can save tax on the investments made at the time of investment, and also gains on the investments are tax efficient relative to other tax-saving options.
Note: The tax provisions, as mentioned in the article, are updated as per the Union Budget 2021. The tax benefits will be as per the prevailing tax laws as on the date of the respective investment, and the tax rates for capital gains will be as per the tax laws applicable on the date of redemption and not on the date of investment.