Smart things to know about redeeming ELSS SIPs (2024)

FAQs

Can I withdraw money from ELSS SIP? ›

Unfortunately, there is no option to withdraw your ELSS investment before the lock-in period of three years. While other funds allow you to take a loan against securities, this option is not available with ELSS funds.

You can redeem your ELSS lump sum investments in two ways. One, you can raise a request online, by login into the mutual fund website and raising a redemption request. Similarly, if you had done it through an app, you can redeem your funds using the same app.

The redemption proceeds of ELSS are not entirely tax-free. The long-term capital gains of up to Rs 1,00,000 a year are tax-free, and any gains above this limit attract a long-term capital gains tax at the rate of 10% plus applicable cess and surcharge.

There were 40 ELSS schemes. All schemes had offered negative returns during the January-March quarter. Out of 40 schemes, 35 schemes managed to beat their benchmarks. The tax saving or ELSS mutual fund category lost around 3.89% on average in the January-March quarter in 2023.

ELSS funds have a lock-in period of three years which is the lowest compared to other investments under the section. Hence, you cannot redeem the units of an ELSS fund before the completion of three years. This helps in generating compounded returns.

After the 3 year lock-in period, the investor has redeemed the ELSS at Rs 3 lakh where, as per the above criteria, Rs 1.5 lakh will be exempted from tax. Thus, taxable income after deduction of Rs 1.5 lakh from Rs 3 lakh equals Rs 1.5 lakh.

If the long-term capital gains are less than Rs 1 lakh, then you don't have to pay any tax. However, you make short-term capital gains on the units purchased through the SIPs from the second month onwards. These gains are taxed at a flat rate of 15% irrespective of your income tax slab.

The lock-in period in ELSS refers to the three years from the date of investment when you can't withdraw your money. In other words, you can redeem your ELSS investment only after three years. Each SIP is locked in for three years if you make an ELSS investment through the SIP.

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.

After the end of the lock-in period, the fund becomes a diversified, open-ended equity-oriented scheme. You can redeem the units whenever you want. If you have invested via a SIP, then it is important to remember that the lock-in period will be applicable based on the date of purchase of the units or the SIP date.

Why is ELSS tax free? ›

ELSS funds are equity funds that invest a major portion of their corpus into equity or equity-related instruments. ELSS funds are also called tax saving schemes since they offer tax exemption of up to Rs. 150,000 from your annual taxable income under Section 80C of the Income Tax Act.

Long term capital gains of up to Rs. 1 lakh a year from ELSS mutual funds are exempt from income tax and long-term capital gains above Rs. 1 lakh are taxed at 10%.

Summary. In this article, we compared and contrasted ELSS versus PPF on several parameters. Both PPF and ELSS are very tax friendly investments. Though ELSS investments are subject to market risks, they offer superior wealth creation potential and more liquidity compared to PPF.

Risks of ELSS

These funds do not offer guaranteed returns as they are high-risk-return investments investing in market-linked instruments and depending on the performance of underlying securities. However, if invested for the long term, they can beat market instability to offer good returns to the investors.

Liquidity Risk

During the lock-in period, the investor can neither redeem nor transfer his or her ELSS investment. In ELSS, the lock-in period may result in liquidity risk as no investment decisions can be taken during the lock-in period.

You can have good returns, but there are also chances of an investor making low to negative returns hence don't invest in an ELSS if your time horizon is 3 years. Invest for the Long term.

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.

The choice to invest in ELSS through SIP or in lumpsum depends on when and why are you investing. If you are looking to save tax at the end of the financial year, investing in lumpsum is your only choice. But if you are investing at the beginning of the financial year, you can either invest in lumpsum or through SIP.

ELSS can be an excellent way to benefit from tax deductions. At the same time, it helps you earn inflation-beating returns. If you want to increase your returns while enjoying tax benefits, you can choose to invest in ELSS. If you want the benefits of both, you can choose to invest in ELSS via SIPs.

How much tax do you pay on ELSS dividends? ›

In the case of ELSS, all capital gains will be long term capital gains. In the case of equity funds, gains after 1 year will be LTCG. These LTCG gains will be taxed at 10% flat beyond an exempt capital gain on equities limit of Rs. 1 lakh.

Here we would discuss one of the best tax saving options: tax saving or tax planning mutual funds or Equity Linked Saving Schemes (ELSS) that have offered investors around 13.35% returns over a long period of 10 years.

Should you invest in multiple ELSS funds? You may consider investing in two or three ELSS funds. However, you may avoid investing in multiple ELSS funds as you could struggle to monitor your investment. You may avoid investing in five or six ELSS funds as it may result in an overlap of your portfolio.

Withdrawing money from a Systematic Investment Plan (SIP) before its maturity date is possible but can have its limitations. While SIPs allow investors to invest small amounts of money at regular intervals and gain significant returns over time, unforeseen circ*mstances may arise, necessitating an early withdrawal.

Investing through SIPs offer high returns on your investments and can even claim a deduction of up to Rs. 1.5 lakh under Section 80(C) of The Income Tax Act, 1961.

Systematic Investment Plan is a better investment option in comparison to Fixed Deposit especially if you consider the flexibility of investment, advantage of diversification, tax benefits, and higher returns. That is why it is better to invest in a systematic investment plan than in fixed deposit.

You can definitely invest in more than one ELSS. The only thing to remember is that you can only save upto Rs 1.5 lakh under section 80C. If you are already saving 1.5 lakh, you can choose another equity scheme rather than going for another ELSS. Invest in ELSS only if you want to save taxes.

Periodic investment is a great solution. For salaried investors, it will also help to balance out their monthly income rather than investing lumpsum in ELSS funds. Other than being a great tax-saving investment, ELSS has a minimum lock-in period of 3 years as compared to 5 or more years for other tax-saving options.

ULIPs are comparatively less risky than ELSS because the policy coverage is guaranteed even if the fund returns are not. Also, the ULIP can have equity, debt, or hybrid fund units that also decide the risk factor of the ULIPs.

Can I have both PPF and ELSS? ›

Equity Linked Savings Scheme and Public Provident Fund are savings schemes for tax benefits. As an investor, you can invest in either of the schemes or both.

Yes, in the case of unfortunate passing away of the original unitholder, the nominee or legal heir can redeem the ELSS fund units after one year from the date of allotment of units to the deceased unitholder. This means that the nominee/legal heir needn't wait for the full lock-in period of three years.

You simply have to log-on to the 'Online Transaction' page of the desired Mutual Fund and log-in using your Folio Number and/or the PAN, select the Scheme and the number of units (or the amount) you wish to redeem and confirm your transaction.

Why 2-3 Funds is The Ideal Number of ELSS Funds? Investment in an ELSS or tax-saving fund is eligible for tax deduction up to Rs 1.5 lakh per annum. This is given under Section 80C of the Income Tax Act, 1961. ELSS funds are required to invest at least 80% of their assets in equities (stocks).

High and Low Ratios

A number of factors determine whether an expense ratio is considered high or low. A good expense ratio, from the investor's viewpoint, is around 0.5% to 0.75% for an actively managed portfolio. An expense ratio greater than 1.5% is considered high.

If you have Rs. 50 lakhs to invest and want higher returns on it, an equity fund would be your best option. However, this is only for aggressive investors who are not afraid of the risks involved. On the other hand, if you want to play safe, a fixed deposit or a post office scheme would be more beneficial for you.

This 10% tax that you pay on the profit you earn from investing in ELSS for a year or more is known as LTCG tax. [For ELSS funds lock-in period would be 3 years.

ELSS – ELSS funds are helpful for both immediate and long-term objectives. They also provide greater returns than NPS. They also pose a greater risk than NPS, though. In contrast to NPS, ELSS funds have a shorter lock-in period of three years, and investments are eligible for tax deductions under section 80C.

What is the return of ELSS after 20 years? ›

We have a history going back up to 30 years for ELSS or tax-saving funds. If you look at these 30-year returns or if you invested and forgot about them, the ideal thing will be picking the rolling return of any of these funds with over 20-year history. The returns of these funds will range between 15-20 per cent.

You may invest in equity funds or ELSS mutual funds for retirement. You must invest in equity funds for the long-term to achieve long-term financial goals such as retirement planning. You may invest in direct plans of equity funds and ELSS through an asset management company.

Risks of ELSS

All mutual funds are subject to market risks, especially equity funds and so is ELSS. These funds do not offer guaranteed returns as they are high-risk-return investments investing in market-linked instruments and depending on the performance of underlying securities.

ELSS decoded

Other than being a great tax-saving investment, ELSS has a minimum lock-in period of 3 years as compared to 5 or more years for other tax-saving options. Also, the gains in ELSS are only partially taxable (long-term capital gains on equity or equity mutual funds up to Rs 1 lakh is tax-free).

The choice to invest in ELSS through SIP or in lumpsum depends on when and why are you investing. If you are looking to save tax at the end of the financial year, investing in lumpsum is your only choice. But if you are investing at the beginning of the financial year, you can either invest in lumpsum or through SIP.

ELSS is a type of Mutual Fund which allows you to claim for income tax deduction. You can save up to ₹ 1.5 lakhs a year in taxes by investing in ELSS, which is covered under Section 80C of the Income Tax Act, 1961.

SIP Tax Benefit

SIP under Equity Linked Saving Schemes (ELSS) comes under the EEE (Exempt, Exempt, Exempt) category. This means, the amount invested, the amount on maturity and the withdrawal amount all are tax-free. With SIP in ELSS fund, one can claim a deduction of up to Rs. 1,50,000 per year.

From the table above, you can see that a PPF investment is a relatively safer option. However, PPF offers much lower returns over a longer time horizon than ELSS. The tax benefits and capital safety are more in favour of PPF; ELSS certainly is an option for better returns.

Diversification: Instead of solely banking on one ELSS, choose 2-3 tax saving funds in your portfolio. Look at the portfolios of the schemes and ensure that the ones you have selected have varied allocation to different sectors and stocks. This will give you scheme-wise and portfolio-wise diversification.

What are the average returns for ELSS funds? ›

Multi-cap schemes are more volatile than large-cap or mid-cap schemes, but they also have higher ROIs than both types of SIPs.

You can definitely invest in more than one ELSS. The only thing to remember is that you can only save upto Rs 1.5 lakh under section 80C. If you are already saving 1.5 lakh, you can choose another equity scheme rather than going for another ELSS. Invest in ELSS only if you want to save taxes.

PPF is suited for individuals who are absolutely risk-averse and can afford a 15-year lock-in period. Whereas those investors who are willing to take a moderate risk to earn higher returns can opt for ELSS. The best way to reduce risk in ELSS to its minimum is by staying invested for the long term.