What is Equity Linked Savings Scheme (ELSS)?
ELSS is a diversified, open-ended Equity Mutual Fund that offers higher returns as well as great tax benefits. The tax exemptions are offered as stipulated under Section 80C of the Income Tax Act. A major portion of the capital is invested in equity funds. The lock-in period applicable on these funds is 3 years and the investors can exit the scheme by selling it after this period.
How to Invest in an Equity Linked Savings Scheme?
Equity Linked Savings Schemes have lower investment threshold – the minimum amount that can be invested is just Rs. 500. Investors can also choose to invest a lump sum of funds at a go, or invest on a monthly basis in equity oriented assets by way of SIPs (Systematic Investment Plans).
Who Can Invest in ELSS?
ELSS is a good investment option for individuals who are at early stages in their careers. Individuals who do not earn glamorous salaries and want to make investments in products that carry relatively low risk can consider ELSS. This scheme is also ideal for investors who earn substantially through some form of high-risk investments and require a means to save on tax.
ELSS has no age gap, so individuals can start investing as soon as they start earning. ELSS can also work very well for individuals who are looking for diversity in their investments by investing in the top three or four high-performing ELSS so as to accrue impressive returns over a period of time.
Key Factors to Know Before Availing an Equity Linked Savings Scheme
- The investor should ensure that the fund has long-term performance so that they get assured returns.
- Other details pertaining to the fund, such as – the fund portfolio, volatility of the fund, the expense ratio of the fund, etc., have to be looked into.
Advantages and Disadvantages of ELSS
|The lock-in period is set at just three years, which is much lower when compared with other MF options.||It is rather hard to decide the fund in which you want to make your investment.|
|The returns offered by ELSSs are considerably high.||The documentation required to invest in an ELSS is a lot.|
|The earnings through an ELSS post the lock-in period are exempt from tax.||The returns offered by ELSSs are not guaranteed considering it is an equity-based MF that is subject to market conditions.|
|There is no cap or limit on how much you can invest in an ELSS.||Premature withdrawals are not allowed.|
|The power of compounding essentially helps investors multiply their principal amount and earn impressive returns.||Indians who reside in the US or Canada are not allowed to make investments in most mutual funds.|
Benefits of Equity Linked Savings Scheme
- Compared to other tax saving financial instruments like bank deposits, PPF and NSC investments, ELSS has the lowest lock-in period, i.e., 3 years.
- Investors have the option of earning regular income during the lock-in period, by opting for a dividend scheme under ELSS.
What are the Options Available for Investment in ELSS?
There are three options for investors who wish to put their money into ELSS. They are as follow:
- Growth Option: Under the growth option, holders do not receive any benefits via dividends. Benefits will only be given to holders when the tenure of the ELSS is complete, and these benefits help in increasing your NAV, thereby multiplying your profits. The profits earned by an investor will depend on market conditions.
- Dividend Option: Under the dividend option, investors receive benefits in the form of dividends on a timely basis as opposed to a lumpsum figure at the end of the tenure. Any dividends earned under this option are exempt from tax and the investor will get the whole amount.
- Dividend Reinvestments Option: Under this option, a holder will have the option to return the dividends earned as doing so will mean that value is added to the NAV. A good number of investors tend to choose this option, especially when the market performance is good over the course of the 3-year lock-in period.
Features of Equity Linked Savings Scheme
- Dividend and Growth Options – The investor can choose either the dividend or the growth option under their Equity Linked Savings Scheme. In the growth scheme, the investor will receive a lump sum amount after the lock-in period. Under the dividend scheme, the investor will receive a dividend regularly, during the 3 year lock-in period.
- Tax Benefits – Tax is not levied on the returns earned from an Equity Linked Savings Scheme. Up to Rs. 1, 50,000 of the investment can be claimed for tax deduction from the gross total income, as per the provision stated under Section 80C of the Income Tax Act.
- Systematic Investment Plan – The investor can use the SIP or Systematic Investment Plan to invest in ELSS. This also helps to better plan and execute your tax savings.
Other Features of ELSS
|Lock-in period||3 years|
|Returns||Depends on market conditions; there is no assured returns.|
|Safety/ Risk||High risk funds|
|Tax exemption||As per Section 80C of the Income Tax Act, investment in ELSS up to Rs. 1, 50,000 will be exempted from tax.|
|Tax on interest/ returns||Capital gains and dividends are tax free.|
|Maximum investment||No maximum limit on investment|
|Minimum investment||Rs. 500|
GST rate of 18% applicable for all financial services effective July 1, 2017.