What Is ELSS Funds And How They Are Helpful For Tax Savings?

ELSS fund or Equity Linked Savings Scheme fund is a tax-saving scheme that derives their returns from the equity market. The ELSS funds come with a lock-in period of three years. The investor cannot withdraw from the ELSS scheme during this duration. The ELSS fund gives twin advantage of capital appreciation and tax benefits.

The ELSS funds are mostly open-ended mutual funds. They help the investor to save tax under the Section 80C, and the taxable deduction available for this investment is upto Rs.1,50,000. The ELSS funds are suitable to inculcate the habit of saving among investors as the lock-in period prohibits the withdrawal of the investment for three years.

The ELSS comes with a low investment threshold of Rs.500 and the investor need not make a one-time investment for ELSS.  They can opt for the Systematic Investment Plan(SIP) method where they will invest a pre-set amount on a specified date of every month or six months. Through the SIP method, the investor has the option to spread their investments over the year, and this saves the last minute rush for searching for investments that help in tax savings.

However, when the investors opt the method of SIP payment, they should be aware of the fact that every SIP payment is considered as a fresh investment and it has an individual locking period of three years. The ELSS funds are the only investment with a low lock-in period of three years when compared to other tax saving investments.

When calculating SIP for the ELSS investment, the investor has to make sure that their investments are spread over the year. The investor has to use this simple formula to arrive at their SIP calculation

The ELSS funds come with two options for Growth and Dividend. The investor can choose the option that aligns with financial goals.

Growth option:

In this option, the investment along with its profit is accumulated, and the total amount is paid to the investor at the end of the lock-in period with an option of reinvestment.

Dividend Option:

The dividend option comes with two choices of dividend payout and dividend reinvestment. In dividend payout, the investor will receive the payment of a dividend from time to time. In dividend reinvestment, the payout is reinvested, and it will be treated as a fresh investment with the benefit of a tax deduction

The tax saving feature of ELSS funds:

Under Section 80C of the Income Tax Act,1961 a tax payer can claim up to Rs.1,50,000 as relief against their investments. Under the new budget rules, the long-term capital gains (for investments held more than one year) exceeding more than Rs.1,00,000 are subject to 10% tax without benefit of indexation.

The ELSS funds are the best option as tax saving investments as they have the power to give benefits of high returns with the flexibility of investment and the lowest lock-in period when compared to other investments.