What is ELSS: Meaning and benefits

ELSS mutual funds are in flavour. They help save tax, provide flexibility, and can help you create a wealth corpus

Unlike the other investment instruments under Section 80C of the Income Tax Act, investing in Equity Linked Savings Scheme (ELSS) is a cost-effective strategy to reduce taxes. ELSS has a brief lock-in period and expert fund management, which can help you build wealth. This article will go over some features of ELSS funds and how you can use ELSS for tax benefits.

What is ELSS?

ELSS is the only mutual fund qualified for tax deductions under Section 80C of the Income Tax Act, 1961. By investing in ELSS mutual funds, you can get a tax rebate of up to ₹1,50,000, allowing you to save up to ₹ 46,800 every year in taxes. ELSS mutual funds invest primarily in equities and equity-linked instruments. They have the shortest lock-in duration of three years.

Why should I invest in ELSS?

Here are some benefits of investing in ELSS mutual funds:

1. Short lock-in period

ELSS has a lock-in period of three years. Fixed deposits (FDs) have a five-year lock-in, while Public Provident Funds (PPFs) have a 15-year maturity. Hence, ELSS is a worthwhile investment instrument if you want greater liquidity.

2. Aids in wealth creation

ELSS mutual funds leverage compounding to earn returns. Compounding is a tool that earns interest on interest. The returns earned through investments in ELSS earn returns themselves, which helps increase investors’ capital.

3. Flexibility

Investing in ELSS is simple and easy. You do not need a high starting capital to invest in ELSS mutual funds. You can begin with ₹500 as well.

When should you invest in an ELSS?

You should think about investing in an ELSS when:

1. You want to create wealth

Since ELSS uses compounding, you stand to gain more in the long run. Compound interest (also known as compounding) is the interest on a deposit computed using the principal and the interest accumulated over time.

2. You want exposure to equities

ELSS gives you exposure to the securities market. While it carries risk, it isn’t as risky as investing directly in equities.

3. You want tax benefits

ELSS long-term capital gains (LTCG) are tax-free up to ₹1 lakh. Gains over that are subject to a 10% tax rate.

Things to remember before investing in ELSS funds

Before you decide to invest in an ELSS mutual fund, you must:

1. Fix your investment horizon

To invest in ELSS funds, you must have a longer-term vision. As the markets are volatile, ELSS funds yield better returns when invested for at least three years.

2. Have realistic returns expectation

You should be aware that ELSS funds do not guarantee returns because their success is dependent on the performance of the underlying stocks. Having a longer investment horizon can yield decent returns and meet your investment goals.

3. Know the lock-in term

ELSS mutual funds have a three-year lock-in duration. Your investments will be locked in for three years, so you must know it before investing in ELSS.

You can decide your SIP amount and choose the date you want to invest. Using SIPs allows you to accumulate mutual fund units at all prices. When the market is down, you get more units, and you can earn excellent returns when it is up.

However, before investing in an ELSS, you must first complete a KYC verification process. You must submit a photo in the prescribed format, your PAN card, and valid address proof. You can invest in ELSS funds online through IDFC FIRST Bank’s mobile banking app.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.