What is ELSS?ELSS is a type of mutual fund that primarily invests into equities. ELSS invests a majority of its total assets into equities and equity-related instruments. The percentage of the total assets invested in equities varies across funds.
Other features of ELSS
- Tax-saving benefits Among all the mutual fund categories, it’s only ELSS that offers tax saving benefits. Investments made up to Rs. 1.5 lakhs in a financial year in ELSS are exempted from taxation under section 80C of the Income Tax Act, 1961. In other words, you can claim an exemption on investments made up to Rs. 1.5 lakhs in a financial year in an ELSS fund.
- Lock-in period of 3 years ELSS has a lock-in period of 3 years. It means, you can’t redeem your investments before 3 years. Note that among the various tax-saving avenues as outlined under section 80C, ELSS has the shortest lock-in period. Others such as a public provident fund (PPF), national savings certificate and tax-saving bank fixed deposit have a lock-in period of 15 years and 5 years respectively.
- Lump sum and SIP investment There are two modes through which you can invest in ELSS – lump sum and systematic investment plan (SIP). While you can invest a large amount at one go in the former, the latter entails investing a fixed amount every month, which is debited from your bank account. The minimum amount that you can invest via SIP is as small as Rs. 500 per month.
- Capital gains The profits made through ELSS investment are referred to as capital gains. These are subjected to long-term capital gains (LTCG) and short-term capital gains (STCG) tax. Note that you need to pay a 10% LTCG tax, if the gains made in a year is above Rs. 1 lakh. On the other hand, if you need to pay an STCG of 15% if you redeem your investment before a year.
Why to invest in ELSS?
- To gain from the high return potential of equities Investing in ELSS gives you the chance to gain from the high return potential of equities in the long run. For instance, even a modest SIP of Rs. 5000 in an ELSS fund offering annualised returns of 12% for a period of 5 years can help you garner a corpus of over Rs. 40 lakhs.
- High liquidity Since the lock-in period of ELSS is just 3 years, it’s highly liquid. It means you can redeem your investments after 3 years, in case the need arises.
Explore our list of ELSS Funds here.
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.
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