- Date : 15/03/2023
- Read: 4 mins
How an Equity Linked Savings Scheme works well for investors? You can read the article to know more.
As the end of the financial year approaches, taxpayers are trying to find ways to reduce their tax liabilities. While several investment options are available in the market, Equity Linked Saving Scheme (ELSS) has become popular among investors. It offers tax savings under Section 80C of the IT Act and an opportunity to earn potentially higher returns than traditional tax-saving instruments. This article will explore why ELSS works well for patient investors and how it can help them save taxes.
This article has been divided into the following sections :
- What is an ELSS? How does ELSS help in tax planning?
- Factors to consider before investing in ELSS
Also Read: Multiple resources available for financial professionals
What is an ELSS? How does ELSS help in tax planning?
ELSS funds are mutual funds that allocate a significant proportion (80% or more) of total funds to equity (or equity-related instruments). Under Section 80C of the Income Tax Act, these funds are considered helpful in tax savings as they provide tax exemption up to Rs. 1,50,000 from your annual taxable income. Investing in ELSS funds can help you save tax and increase your wealth over the long term.
Read the article: About advanced market and insights
Factors to consider before investing in ELSS
Given below are multiple factors to consider before investing in ELSS. Carefully considering all the factors mentioned below can help in tax saving, wealth creation, and risk management (as per individual risk tolerance).
Maximum investment limit under Section 80C
Under Section 80C of the Income Tax Act, you can claim tax benefits by investing a maximum of Rs 1.5 lakh. However, if you invest more than this, you will not be eligible for tax benefits.
To ensure that you have invested the maximum amount eligible for tax benefits, review your contributions to the employees' provident fund (EPF), life insurance premium, National Saving Certificate (NSC), tuition fees, public provident fund (PPF), and other eligible investments. If you still need to invest up to the Rs 1.5 lakh limit, consider investing the remaining amount in ELSS funds. This is just a guide. You can take a call as per your investment needs.
Lock-in period for investments under ELSS
With a lock-in period of 3 years from the date of allotment, ELSS has the shortest lock-in among all tax-saving options.
Tax Benefits
Income earned through ELSS after the three years is categorised as Long Term Capital Gain (LTCG). LTCGs that exceed Rs. 1 lakh per financial year are subject to a 10% tax.
Investment: Lump-sum vs Systematic Investment Plan (SIP)
SIP is considered better than a lump-sum investment in ELSS as it allows investors to invest smaller amounts at regular intervals, thereby reducing the risk associated with market volatility. This approach also enables investors to average the investment cost over time and achieve higher returns. On the other hand, a lump-sum investment requires a significant amount of capital upfront and may expose investors to greater market risks.
Portfolio diversification and risk management:
ELSS is a type of mutual fund in India that invests primarily in stocks, focusing on small-caps, mid-caps, and large-caps. Investors should do research based on risk tolerance, investment goals, and investment horizon, whether to invest in ELSS investing in small caps or mid caps or large caps. Small-cap stocks have the potential to offer high returns, but they also come with increased risk due to their volatile nature. Mid-cap stocks balance risk and returns, making them a good choice for investors with a moderate risk appetite. Large-cap stocks are relatively stable and offer reasonable returns with lower risk.
Also Read: About multiple available investment options
Before investing in ELSS, it's essential to consider several factors. These include your risk profile, lock-in period, and tax-saving benefits under Section 80C. In addition, review your contributions to other investments made under Section 80C, such as EPF, PPF, NSC, and tuition fees. By carefully considering these factors, you can choose the suitable ELSS scheme that aligns with your investment goals and risk tolerance. This may lead to higher returns over the long term.
As the end of the financial year approaches, taxpayers are trying to find ways to reduce their tax liabilities. While several investment options are available in the market, Equity Linked Saving Scheme (ELSS) has become popular among investors. It offers tax savings under Section 80C of the IT Act and an opportunity to earn potentially higher returns than traditional tax-saving instruments. This article will explore why ELSS works well for patient investors and how it can help them save taxes.
This article has been divided into the following sections :
- What is an ELSS? How does ELSS help in tax planning?
- Factors to consider before investing in ELSS
Also Read: Multiple resources available for financial professionals
What is an ELSS? How does ELSS help in tax planning?
ELSS funds are mutual funds that allocate a significant proportion (80% or more) of total funds to equity (or equity-related instruments). Under Section 80C of the Income Tax Act, these funds are considered helpful in tax savings as they provide tax exemption up to Rs. 1,50,000 from your annual taxable income. Investing in ELSS funds can help you save tax and increase your wealth over the long term.
Read the article: About advanced market and insights
Factors to consider before investing in ELSS
Given below are multiple factors to consider before investing in ELSS. Carefully considering all the factors mentioned below can help in tax saving, wealth creation, and risk management (as per individual risk tolerance).
Maximum investment limit under Section 80C
Under Section 80C of the Income Tax Act, you can claim tax benefits by investing a maximum of Rs 1.5 lakh. However, if you invest more than this, you will not be eligible for tax benefits.
To ensure that you have invested the maximum amount eligible for tax benefits, review your contributions to the employees' provident fund (EPF), life insurance premium, National Saving Certificate (NSC), tuition fees, public provident fund (PPF), and other eligible investments. If you still need to invest up to the Rs 1.5 lakh limit, consider investing the remaining amount in ELSS funds. This is just a guide. You can take a call as per your investment needs.
Lock-in period for investments under ELSS
With a lock-in period of 3 years from the date of allotment, ELSS has the shortest lock-in among all tax-saving options.
Tax Benefits
Income earned through ELSS after the three years is categorised as Long Term Capital Gain (LTCG). LTCGs that exceed Rs. 1 lakh per financial year are subject to a 10% tax.
Investment: Lump-sum vs Systematic Investment Plan (SIP)
SIP is considered better than a lump-sum investment in ELSS as it allows investors to invest smaller amounts at regular intervals, thereby reducing the risk associated with market volatility. This approach also enables investors to average the investment cost over time and achieve higher returns. On the other hand, a lump-sum investment requires a significant amount of capital upfront and may expose investors to greater market risks.
Portfolio diversification and risk management:
ELSS is a type of mutual fund in India that invests primarily in stocks, focusing on small-caps, mid-caps, and large-caps. Investors should do research based on risk tolerance, investment goals, and investment horizon, whether to invest in ELSS investing in small caps or mid caps or large caps. Small-cap stocks have the potential to offer high returns, but they also come with increased risk due to their volatile nature. Mid-cap stocks balance risk and returns, making them a good choice for investors with a moderate risk appetite. Large-cap stocks are relatively stable and offer reasonable returns with lower risk.
Also Read: About multiple available investment options
Before investing in ELSS, it's essential to consider several factors. These include your risk profile, lock-in period, and tax-saving benefits under Section 80C. In addition, review your contributions to other investments made under Section 80C, such as EPF, PPF, NSC, and tuition fees. By carefully considering these factors, you can choose the suitable ELSS scheme that aligns with your investment goals and risk tolerance. This may lead to higher returns over the long term.
