Equity Linked Saving Scheme or ELSS is one of the top tax saving options. This investment scheme not only gives you tax benefit but also good return. However, this scheme may have some pitfalls thus due care is required. Recently, there is a change in tax rules as well. You should also know about that. In this post, I would tell you the 5 most important things about the ELSS or tax saving mutual fund.
#1- It is a Diversified Equity Mutual Fund
The name of the equity-linked saving scheme may suggest otherwise, but it is a mutual fund scheme. It is similar to any other mutual fund scheme which invests in share market.
The mutual funds may invest in shares and bonds. But the ELSS funds invest only in equities (shares). It is just like a diversified equity mutual fund which invests in different types of shares.
The shares of ELSS may be of a large company or small company, there is no such restriction. However, normally, ELSS fund invests into the shares of big and mid-size companies.
The ELSS schemes are sold by the mutual fund company. The rules of the mutual fund also apply in this scheme.
#2- No Guarantee of Return
The ELSS invests in shares so the return of this scheme is also similar to the shares. Let me tell you that shares have the highest potential for return. In the long run, you can earn about 15-20% return per year. This is also applicable to the ELSS.
But, this return of ELSS is subject to the ups and downs of the share market. The share market goes through the good and bad phase. If you withdraw your money during the bad phase, you might bear the loss. While withdrawing money during the ‘rally period’ would give you a handsome return. Hence the timing is very important for a mutual fund or equity-linked saving scheme.
#3- The Fund is locked For 3 Years
Every tax saving scheme has a lock-in period. Similarly, ELSS also locks your fund. The lock-in period of ELSS is 3 years. Do you know? ELSS has the shortest lock-in period among all the tax saving scheme. ULIP, tax saving FD, NSC, EPF have a lock period of 5 years. In a PPF account, your investment matures in 15 years.
#4- Investment Gives Tax Benefit
The investment into equity Linked Saving scheme gives you the benefit of tax deduction under section 80C. According to this rule, the amount you invest into the ELSS would be deducted from your taxable income. This results in the lower tax liability.
You can claim a deduction of up to ₹1.5 lakh under section 80C of the income tax act. Besides ELSS, there are other investment options under section 80C.
But, the return from ELSS is NO MORE tax-free. In the budget 2018, the government has withdrawn the tax benefit to the shares. Now, the long-term capital gains from shares and equity mutual fund are taxable at the rate of 10%. Thus, there would be a tax of 10% on the gains from ELSS, as well.
#5- Every SIP Instalment is A New Investment
Often people use the SIP method to invest in ELSS. In this method of investment, you deposit a fixed sum every month for a predetermined period. This way of investment is good for disciplined saving and protects you from market ups and downs.
But, you should note that every monthly deposit is considered as a new investment. The lock-in period would be separate for each instalment.
|Schedule of 6 Month SIP of An ELSS|
|Jan 2018||Jan 2021|
|Feb 2018||Feb 2021|
|Mar 2018||Mar 2021|
|Apr 2018||Apr 2021|
|May 2018||May 2021|
|Jun 2018||Jun 2021|
These were the most important facts about the Equity Linked Saving Scheme. For more information, you should read my detailed post on the Tax saving mutual fund.