If you are thinking of investing money while saving tax with a shorter lock-in period, then ELSS is a very good option to put your money in. ELSS stands for Equity Linked Savings Schemes. By investing in ELSS, investors can claim a deduction up to Rs 1.5 lakh under section 80C of the Income Tax Act in a financial year. In this article, we will understand the tax benefits you can get by investing in ELSS.
Lock-in period and investment cap:
Usually, ELSS funds have a lock-in period of three years. During this period one cannot withdraw money from the scheme during the lock-in period. Most of the fund houses allow people to start investing in ELSS with a minimum amount of Rs 500. However, there is no maximum limit for investment in tax saving funds but deduction can be claimed only up to Rs 1.5 lakh in a financial year under section 80C. One can invest in ELSS mutual fund schemes either through SIP or lump sum.
How can you invest in ELSS?
You have to fill the form along with the cheque at the branch office or registrar office of the fund house. One can also invest in ELSS online through the fund house website or through aggregators or from your Demat account. You will get a folio number once you invest in ELSS. By providing this folio number you can invest in the ELSS scheme in future.
Investors have various options while investing in ELSS mutual funds. One can choose from growth option, dividend option and dividend reinvestment option.
Dividends are not paid to the investors in the growth option but here growth is more as compared to the other two options. Gains/losses are available only while redeeming the scheme or switching to it.
In the dividend option, a dividend is paid to the investors. However, the declaration of dividends completely depends on the fund house. Notably, the dividend paid is taxable.
In the dividend reinvestment option, the dividend declared by the fund house is reinvested in the scheme. Dividend reinvestment also has a lock-in period.
Tax on withdrawal:
Tax exemption under section 80C is available on investment in ELSS funds. If you withdraw money from the scheme after the lock-in period is over, then it is taxed. As per the existing tax laws, long term capital gains tax is levied if the money is held in equity mutual funds for more than one year. If gains from ELSS mutual funds exceed Rs 1 lakh in a financial year, then the tax without indexation benefit is taxed at the rate of 10 percent. However, gains up to Rs 1 lakh are not taxable.
Understand the risks before investing:
Most of the money you invest under ELSS is invested by fund house in the stock market. Due to this, volatility and risk are higher in ELSS as compared to Tax Saving Fixed Deposits and other bond schemes. In case of tax saving FD, the returns are known at the time of investment, whereas the performance of ELSS is market-linked.