Best Ways to Invest in ELSS and Reduce Tax Obligation

In this article, we shall explore the best ways to invest in ELSS funds.

ELSS, although a favorable investment avenue, is ultimately a tax-saving product that comes with a lock-in period. If you are looking to considering investing in an ELSS, you must first and foremost check your tax slab and expected taxable income. This cardinal step shall enable you to form an informed opinion about two crucial aspects:

1. Do I need to invest in an ELSS fund or any other tax-saving product for that matter?
2. How much money do I need to allocate towards ELSS?

Most people put off tax-planning until the last minute and then end up making wrong investment choices. This is because many people find it difficult to allocate a huge sum of money at once towards savings.
Although there are various tax-saving instruments that require investors to fork out the entire amount as a lump sum, an ELSS fund allows investors to make regular, smaller investments throughout the year.This can be achieved through Systematic Investment Plans (SIPs). Moreover, being an equity investment, ELSS funds are exposed to market volatility, and investing regularly through SIP shall help investors to achieve rupee-cost averaging.Starting early helps you plan your investment better and not leave tax-planning for the end of the year.

Just like other mutual fund schemes, ELSS funds also allow investors to choose from 3 different options for dividend treatment- growth, dividend payout, and dividend reinvestment. Under the dividend reinvestment plan, the dividend earned by the scheme shall be plowed back into the as fresh investment for which the investor shall receive units as per the ongoing NAV rate.The issue with ELSS funds is that they come with a lock-in restriction of 3 years. The fresh units received in lieu of dividend shall stay locked in for a period of 3 years. This shall make it difficult to keep track of your overall returns.

After the lock-in period ends, your ELSS fund shall act as a regular open-ended scheme. However, it is advisable to review essential factors such as returns, volatility, etc. when you want to exit from a mutual fund scheme and not just exit because the lock-in period has ended. ELSS being an equity-oriented investment, it is crucial to plan your exit strategy carefully.Through these tips and tricks, you can effectively plan your ELSS investment and thus reduce your tax obligation.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.