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Whenever the tax season approaches, have you often been suggested to invest in ELSS to save money on taxes? What exactly is ELSS? It is a type of mutual fund that invests primarily in equity and comes with a lock in period of 3 years. ELSS has the shortest lock in period amongst all other tax saving instruments i.e., 3 years. It offers investors dual benefits of tax saving as well as capital appreciation. ELSS is managed by professional fund managers who invest in stocks after extensive research and analysis. Hence it is best recommended for investors who want to save taxes but do not have time to research and invest. Also Read : 6 Benefits Of Investing With Top Mutual Funds in India
Myths surrounding ELSS
There are a few myths surrounding ELSS that investors should be aware of:
- ELSS investments are risky: This is not entirely true. While ELSS investments are linked to equity markets and thus carry a certain amount of risk, they also provide the potential for higher returns over the long term. It is always best to do your research and invest wisely be it the safest investment option in the world.
- ELSS is only for tax-saving purposes: While ELSS is a popular tax-saving investment; it is also a good option for long-term wealth creation. Investors can continue to hold their ELSS investments even after the lock-in period have ended, allowing for potential long-term gains.
- ELSS is only for experienced investors: This is a common misconception. ELSS is suitable for both new and experienced investors, as long as they understand the risks and potential returns associated with equity investments. It is always important to seek advice from a financial advisor before investing.
FAQS - FREQUENTLY ASKED QUESTIONS
Can ELSS be redeemed after the lock-in period ?
Yes, ELSS units can be redeemed after the mandatory lock-in period of three years. Investors can choose to redeem their units partially or fully as per their requirement.
Can the benefit of saving tax on ELSS be taken for each of the 3 years or only in the year of investment ?
The benefit of saving tax on ELSS can only be taken in the year of investment. ELSS investments qualify for tax deductions under Section 80C of the Income Tax Act, up to a maximum of Rs. 1.5 lakh per financial year. The tax benefit is only available for the fiscal year in which the investment is made and cannot be carried forward or claimed in the subsequent years.
Does ELSS guarantee fixed returns ?
As ELSS involves making investment in the equities which is subject to market risk and hence its performance is directly linked to the performance of the stock market. Therefore, it does not guarantee any fixed returns.
How do I incorporate ELSS in my overall financial plan ?
To incorporate ELSS in your overall financial plan, you can start by setting a financial goal and determining the amount you need to invest in ELSS to achieve that goal. You can then select an ELSS fund that aligns with your investment objective, risk tolerance, and investment horizon. It is important to note that ELSS should not be the only investment in your portfolio and should be complemented by other investment options such as debt funds, equity funds, and fixed deposits to ensure diversification and minimize risk.
How does ELSS work ?
ELSS, or Equity Linked Savings Scheme, invests primarily in equity or equity-related instruments. ELSS is a popular investment option in India, as it offers tax benefits under Section 80C of the Income Tax Act.
ELSS has a lock-in period of three years, which means that investors cannot redeem their investment before the completion of this period.
The amount invested in ELSS is deductible from the investor's taxable income, up to a maximum of Rs. 1.5 lakh per year.
In what mode can the ELSS investment be made ?
Investors can choose to invest in either Lumpsum or SIP mode based on their investment objectives, risk appetite, and financial goals.
Is it better to invest in ELSS or PPF/NSC ?
The potential to generate higher returns in case of ELSS is more compared to other tax-saving instruments such as Public Provident Fund (PPF) and National Savings Certificate (NSC). ELSS also helps investors to diversify their portfolio by investing in companies of different sizes and sectors. Over the last decade, ELSS funds have delivered an average annual return of around 12-15%, which is significantly higher than traditional tax-saving instruments such as PPF or NSC.
Is there a minimum amount of investment in ELSS ?
The minimum amount of investment in ELSS is 500 and there is no cap on the maximum amount.it may vary across different schemes.
What are the benefits of ELSS in the new tax regime ?
There are no specific benefits of ELSS in the new tax regime. However, under the old tax regime, investors can claim deduction up to Rs 1, 50,000 under section 80 C of Income tax act, 1961.
What is the disadvantage of investing in ELSS ?
The only disadvantage of ELSS is that it comes with a lock in period of 3 years which means that you cannot withdraw funds any time before that.
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.