What is ELSS Fund ?

Published On: 14-Jul-2020

ELSS (Equity Linked Savings Scheme) fund refers to the specified equity mutual fund scheme, which invests at least 80% of its net assets in equity-related investments and carries a lock-in period of three years. The investment in such funds is eligible for tax benefit under Section 80C of the Income Tax Act 1961. 

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Why should you invest in ELSS funds?

Here are five key reasons why one should invest in ELSS funds, which is also commonly referred to as tax saver mutual funds:

1.Tax Benefits :

ELSS is one of the available investment options under Section 80C of the Income Tax Act, which allows a tax benefit up to Rs. 1.50 lakhs in a financial year to the taxpayer. The amount of tax benefit is equal to the amount invested during the period, subject to the overall ceiling limit of Rs. 1.50 lakhs considered for all eligible payments/ investments taken together. One may invest in a lump sum or through SIP in ELSS funds to avail of the tax benefit.

2. Lock-in period :

Such mutual fund schemes are subject to a 3-year lock-in period. As such, one cannot redeem the investments in ELSS units before three years from the date of investment. If one is investing through SIP, such a lock-in period is calculated from the actual investment date for each instalment and not from the date of SIP registration. 

3.Taxation:

 Considering the 3-year lock-in period, the gains from ELSS funds will be classified as Long-Term Capital Gains (LTCG). As such, the gains from such funds are taxed at 10% (plus applicable cess and surcharge) without any indexation benefit. Since no benefit of indexation is allowed to the investors, one can directly deduct the redemption value from the cost of units redeemed to calculate the gains. Further, one can also avail an aggregate exemption of Rs. 1 lakh per year in respect of LTCG from equity shares and equity funds, including ELSS, taken together. 

4. No Auto Redemption :

Unlike most of the eligible investments under Section 80C, the investments in ELSS units are not redeemed at the end of the lock-in period. As such, one can continue to stay invested in such funds, even beyond the 3-year lock-in period. This allows the investors to link such investments with their long term financial goals. As such, ELSS enables investors to club their tax savings and financial plans together. 

5. Returns linked to Underlying Investments:

 ELSS provides returns aligned to the investors as per the performance of the securities in the underlying portfolio. 

How to invest in ELSS funds?

One may invest in ELSS funds online by visiting the website of the mutual fund house. The investor must validate the KYC status on the portal by providing PAN details and after that, input the necessary information, including the scheme name, mode of investment, i.e., lumpsum or SIP, etc. Once the same has been entered, the transaction interface will redirect to the payment gateway for the payment towards investment transactions.

After the payment process is completed, an acknowledgement will be generated on the screen and shared through e-mail. The mutual fund house will share the account statement within 1-2 working days after the transaction has been processed. Such an account statement acts as a valid proof to claim tax benefit under Section 80C in the Income Tax Return.

In case one has opted for SIP investments, SIP mandate must be registered on the Net banking portal of the concerned bank account by mentioning the SIP reference number as generated by the transaction portal along with the autopay instructions. Once such mandate has been registered, the payment towards regular SIP instalments would be automatically deducted from the bank account and invested in ELSS funds.

With tax benefits, along with the potential of market-linked returns through ELSS funds, the investors may consider such funds for their investment journey in pursuit of their financial goals.

Note: The tax provisions, as mentioned in the article, are for illustrative purposes only, and are updated as per the Union Budget 2020 passed by the Parliament. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.

Disclaimer: SIP is a process of disciplined investment of a certain amount on a pre-decided date in a specific mutual fund scheme, regularly over a period of time