If you are looking to invest in the stock market and save taxes simultaneously, ELSS (Equity-Linked Savings Schemes) might be a suitable option for you. ELSS is a type of mutual fund that primarily invests in equities (stocks).
With a three-year lock-in period, ELSS offers the potential for high returns along with tax savings, making it a popular choice for long-term investors.
How Do ELSS Funds Work?
ELSS funds pool money from investors to invest in a mix of stocks and other market instruments. These funds come with a mandatory three-year lock-in period, meaning the money invested cannot be withdrawn before three years from the investment date. This feature sets ELSS apart from other tax-saving options like PPF or NSC, which have longer lock-in periods.
Tax Benefits
Under the new tax regime, Section 80C deductions (including those from ELSS investments) are not available. This means that ELSS funds do not provide any tax-saving benefit if you have opted for the new regime. However, if you are following the old tax regime, you can still claim a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act. This makes ELSS funds a suitable choice only for those who are under the old regime and are looking to save on taxes while aiming for long-term capital growth.
Tax Implications of ELSS
Long-term capital gains (LTCG) on ELSS are taxed only if the total gains exceed ₹1.25 lakh in a financial year. Any amount above this limit is taxed at 12.5%, without the benefit of indexation.
Why Should You Invest in ELSS?
High Return Potential: ELSS funds focus on equity investments, which historically offer higher returns compared to traditional instruments like PPF or fixed deposits. However, these returns come with market risk.
Shorter Lock-In: ELSS has a lock-in period of just three years, which is shorter than other tax-saving schemes.
Diversification: ELSS funds invest across a range of stocks, reducing risk compared to investing in a single stock.
How Is ELSS Helpful for Salaried and New Investors?
For Salaried Individuals: ELSS is an excellent option for salaried employees aiming to earn higher returns than EPF. Shorter lock-in period of three years compared to ULIPs (five years) and the NPS (locked until retirement). This flexibility makes ELSS a rewarding choice for wealth creation.
For First-Time Investors: ELSS combines exposure to equity markets, making it a great choice for beginners. Though equity investments can be volatile in the short term, the risks decrease over time. Investing in ELSS via SIPs helps first-time investors systematically invest and accumulate units, especially during market dips, potentially generating good returns over five years or more.
How to Invest in ELSS Funds?
To invest in ELSS funds, you can choose from different options. The growth option allows your investment to grow over time, with returns only realised when you redeem. This option does not provide dividends, but your investment’s value increases, subject to market risks. With the dividend option, you receive regular dividends, but they are taxable according to your income tax slab. Additionally, if your dividends exceed ₹5,000, a 10% TDS is applied. Another option is the dividend reinvestment plan, where dividends are reinvested into the fund, boosting your NAV, especially when the market is performing well.
Disclaimer: The information provided in our blogs is for informational purposes only and should not be construed as financial, investment, or trading advice. Trading and investing in the securities market carries risk. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. Copyrighted and original content for your trading and investing needs.
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