If you're seeking a tax-saving tool with the shortest lock-in period, you might want to explore equity-linked savings scheme (ELSS) mutual funds. By opting investing in an ELSS, you become eligible for a tax deduction of up to Rs 1.5 lakh from your gross total income under section 80C of the Income-tax Act, 1961.
Do mind the risk though. ELSS, being equity-oriented mutual fund schemes, entail higher risk and volatility when compared to tax-saving fixed deposits. It's important to note that unlike tax-saving FDs, where returns are predetermined at the time of investment, ELSS returns are contingent on market performance.
Click here for FY 2023-24 tax-saving guide
Starting from the fiscal year 2020-21, individuals have the option to choose between the old tax regime and a new tax regime. In the old tax regime, individuals can continue to benefit from existing tax exemptions and deductions. Conversely, the new tax regime provides a lower, concessional tax structure without any exemptions or deductions. Under the new tax regime, one forgoes tax breaks such as those provided by Section 80C, Section 80D, Section 80TTA, and others. It's important to note that the new tax regime is now the default option, and a salaried individual must actively opt for the old tax regime. Failure to do so will result in salary taxes being deducted based on the new tax regime. Therefore, the tax advantages associated with investing in ELSS are only available to those who choose the old tax regime.
Investment amount
Most fund houses allow individuals to start with a minimum investment of Rs 500. Though there is no maximum limit on the investment amount, a tax break can be availed for a maximum of Rs 1.5 lakh under section 80C in a financial year. The investment in ELSS mutual fund schemes can be done either as a lump sum or via monthly systematic investment plans (SIP).
Also read: 7 lesser-known investments, expenses eligible for tax breaks
How to invest in ELSS
Before knowing how to invest in ELSS funds, ensure that you're KYC (Know Your Customer) compliant. If not, complete your KYC first. You can easily submit your KYC online through the mutual fund's website or the RTA (Registrar and Transfer Agent) website.
Here is a look at how you can invest in ELSS as per the Aditya Birla Sun Life AMC website.
- Once you're KYC compliant, you can purchase ELSS from an authorised mutual fund distributor or the mutual fund office. However, purchasing ELSS online is the most convenient and recommended way.
- Now, let's understand how to invest in ELSS online through the following easy steps.
- Visit the official website of the mutual fund and select the ELSS you want to invest in.
- Select the investment type- SIP or Lump Su
- Submit your PAN and Date of Birth. The website will automatically retrieve your KYC data.
- Verify your KYC data and fill up some additional personal information in the online form.
- Fill out your investment details like ELSS name, investment tenure, amount, etc
- Pay the amount online to begin your ELSS investment.
Since ELSS is a market-linked scheme, where investment value changes every day, your investment into a mutual fund scheme will be allotted the NAV of the day on which funds are credited to the mutual fund's bank account and is available for utilisation by the AMC.
NAV stands for Net Asset Value. It is the market value of the securities held by the scheme.
Also read: TDS on salary: How to avoid higher income tax under new, old tax regime
Liquidity
As mentioned above, ELSS mutual fund schemes come with the shortest lock-in period of three years from the date of investment. No redemption or switch is allowed during the lock-in period. Once the lock-in period is over, redemption will be done using the First-In-First-Out (FIFO) method, in case of multiple investments.
Taxation
Here is how ELSS investments are taxed, according to the ICICI Bank website:
- Section 80C deduction: If you invest in ELSS funds, you can get a deduction under Section 80C of the Income Tax Act. This lets you lower your taxable income by the amount you spent, up to a maximum of Rs 1.5 lakh per financial year. The money saved will not exceed Rs 46,800, depending on the tax bracket.
- Long-term capital gains (LTCG) tax: ELSS investments are locked in for three years. Any gains made after this time are considered LTCG and are taxed at a rate of 10% on amounts over Rs 1 lakh.
FAQs
You can invest in ELSS the same way that you invest in any Mutual Fund. The easiest way is through an Online Investment Services Account. You can invest either as a lump sum or via the SIP (systematic investment plan) route.
Can we invest in ELSS online? ›
You can invest in ELSS the same way that you invest in any Mutual Fund. The easiest way is through an Online Investment Services Account. You can invest either as a lump sum or via the SIP (systematic investment plan) route.
Which platform is best for ELSS investment? ›
Best ELSS Funds 2022 - Top 10 Tax Saving Mutual Funds
| FUND | NAV |
|---|
| SBI Long Term Equity Fund - Direct Plan - Growth ELSS | 404.219 |
| HDFC ELSS Tax Saver - Direct Plan - Growth ELSS | 1239.12 |
| Motilal Oswal Long Term Equity Fund - Direct Plan - Growth ELSS | 47.6914 |
| BOI AXA Tax Advantage Fund - Direct Plan - Growth ELSS | 175.43 |
16 more rowsMar 21, 2024
- Baroda BNP Paribas ELSS Tax Saver Fund. ...
- Nippon India ELSS Tax Saver Fund. ...
- Motilal Oswal ELSS Tax Saver Fund. ...
- Axis ELSS Tax Saver Fund. #28 of 34. ...
- HSBC ELSS Tax saver Fund. #32 of 34. ...
- Navi ELSS Tax Saver Nifty 50 Index Fund. Unranked. ...
- Parag Parikh ELSS Tax Saver Fund. Unranked. ...
- WhiteOak Capital ELSS Tax Saver Fund. Unranked.
ELSS funds qualify for tax exemptions under Section 80C of the Income Tax Act. Deductions of up to Rs. 1.5 lakh can be availed on the amount invested on ELSS funds. Supporting documents have to be provided by the policyholder to claim deductions.
Can NRI invest in ELSS? ›
ELSS is considered as one of the most preferred options of the tax deduction for NRIs, as one can claim up to maximum deduction of Rs. 1.5 lakhs in a year under section 80C of IT Act. The ELSS scheme offers the benefit of EEE i.e. exempt, exempt and exempt.
Is investing in ELSS risky? ›
Investing in ELSS funds in a lump sum can be a mistake. Because ELSS are equity investments, the market conditions at the time of your lump sum investment will have a significant impact on your returns. Instead, consider lowering your overall risk by making smaller investments throughout the fiscal year.
Is it better to invest in PPF or ELSS? ›
ELSS has higher returns potential, but also higher risk and volatility, while PPF has lower returns, but also lower risk and stability. ELSS is taxed at 10% on long-term capital gains exceeding Rs. 1 lakh per year, while PPF is tax-free at all stages.
Is ELSS taxable after 3 years? ›
After the three-year lock-in period, investors can redeem their investment or stay invested. But the investor must note that the investment after the deductions is still subjected to 10% tax, though ELSS can give high returns in the long term.
Who should not invest in ELSS? ›
You want short-term gains
Chasing quick returns through ELSS funds might not always work, and hence, you should not invest in ELSS funds if you want returns quickly. ELSS funds may be suitable for you only if you have a longer investment horizon.
Disadvantages of ELSS funds
- Higher risk. THE RISK IS ALSO HIGHER since ELSS funds are directly linked to the equity market. ...
- ELSS Liquidity. ELSS mutual funds offer limited liquidity. ...
- Not an option for risk-averse investors. ...
- Limited benefits. ...
- Management cost.
Summing Up SIP vs ELSS
SIP is instrumental in roping in many investors into the mutual fund world and the ELSS scheme pulls investors with its tax-saving feature. While many do use ELSS to save taxes, do keep in mind your risk and goals as well.
Are ELSS returns tax free? ›
Since ELSS funds are locked up for three years, there is no way to realize short-term profit gains. As a result, you can only realize long-term capital gains. These gains are tax-free up to Rs 1 lakh per year, and any earnings beyond this amount are subject to a 10% long-term capital gains tax.
How do I show ELSS on my tax return? ›
There is no condition about the number of ELSSs to qualify for the tax deduction. In short, you can invest Rs 1.5 lakh in a single ELSS and claim tax deduction on the entire amount. Similarly, you distribute Rs 1.5 lakh among four ELSSs and claim tax deduction on Rs 1.5 lakh under Section 80C.
What proof is required for ELSS? ›
ELSS Mutual Fund: Copy of the investment certificate. Public Provident Fund: Stamped deposit receipt or passbook mentioning the PPF account. Life Insurance Policy: Premiums paid towards life insurance. HRA (House Rent Allowance): Monthly rent receipts, PAN Card of the landlord.
What is the average return of ELSS? ›
In a five year and 10-year horizon, the ELSS category offered an average return of 18.50% and 17.05% respectively. “ELSS funds have the capacity to yield returns surpassing those of simple savings schemes.
How do I open an ELSS account online? ›
Visit an investment platform or aggregator to view all the ELSS options available to you. Select a scheme that is best suited for your income and your unique circ*mstances. Complete your registration for the selected ELSS through an authorised channel and receive your folio number.
Is ELSS better than PPF? ›
ELSS has higher returns potential, but also higher risk and volatility, while PPF has lower returns, but also lower risk and stability. ELSS is taxed at 10% on long-term capital gains exceeding Rs. 1 lakh per year, while PPF is tax-free at all stages.
Can I pay ELSS monthly? ›
SIP or Lumpsum: Before making the investment in ELSS, you should also consider which mode you want to invest in, either SIP or lumpsum. Under the SIP method, you can invest a regular amount periodically, typically monthly.
How do I transfer ELSS from one broker to another? ›
The only way to transfer ELSS mutual funds under lock-in from one demat to another is via closure cum transfer. The locked in units can only be moved to another demat account of the same account holder. If the ELSS scheme is out of the lock-in period or has free units, it can be transferred without any restrictions.
