As opposed to the other investment tools available within Section 80C of the Income Tax Act of 1961, investing in ELSS funds is a cost-effective strategy to reduce taxes. ELSS has the benefit of a shorter lock-in period and expert fund management, which can help you build wealth.
The benefit of ELSS over other tax-saving tools is that it has a three-year lock-in period. This implies you may only sell your investment three years after it was purchased! However, to get the most out of ELSS funds, it’s best to leave your money in them for as long as possible. Each installment of an ELSS SIP includes a three-year lock-in period, which means each payment will have a specific maturity date.
What are the features of ELSS Funds?
- Under Section 80C, they provide tax deductions of up to Rs 1,50,000 per year.
- ELSS funds have a 3-year lock-in period, and there are no opportunities for early withdrawal.
- The maximum amount you may invest in an ELSS is unlimited, whereas the lowest amount you can invest varies per fund company.
- ELSS funds have been the only tax-advantaged investment that has the potential to outperform inflation.
- Investing in ELSS funds provides you with tax benefits and the opportunity to build wealth.
- An ELSS fund’s portfolio comprises stocks, with some fixed-income instruments thrown in for good measure.
Tax Benefits of ELSS Funds
Investments in an ELSS fund qualify for tax advantages under Section 80C of the Internal Revenue Code. While there is no upper cap on the amount which can be invested, the Income Tax Act allows for a tax deduction of up to Rs. 1.5 lakh.
This Rs. 1.5 lakh is an aggregate figure, indicating that your Section 80C deduction covers your investment in other tax-saving vehicles like a provident fund, higher savings certificate, life insurance rate, and a few others.
Who should invest in ELSS Funds?
ELSS mutual funds can be invested by any person or HUF who wishes to save money on taxes under section 80C. There is a level of risk associated with ELSS mutual funds. Because of the portfolio’s equity exposure, this is the case. As a result, ELSS mutual funds are better suited for people familiar with equities asset class risk.
When opposed to other tax-saving programs, these tax-saving funds provide larger returns. ELSS investments should be made with a long-term view in mind. ELSS funds have the shortest lock-in time of any asset class that qualifies for a tax deduction under Section 80C of the Internal Revenue Code.
ELSS funds allow investors to diversify their portfolios. Specialized and experienced fund managers manage these tax-saving funds.
Factors to consider before investing in ELSS
Investment horizon: You must have a five-year investment horizon to invest in ELSS funds. The equity fund exposure of ELSS funds needs a longer investment horizon to reduce market volatility.
Returns: Because the performance of ELSS funds is dependent on the value of the underlying equities, you should be aware that they do not guarantee returns. A long-term investment horizon than 5 years, on the other hand, can produce higher returns than any other tax-saving method.
Lock-in period: The duration of an ELSS mutual fund’s lock-in period is three years. You must keep your investments locked in for 3 years from the date of purchase, and you would not be able to redeem them until that period has gone.
An ELSS accomplishes two goals: wealth accumulation and tax minimization. However, the current limit of Rs 1.5 lakh under section 80C has to be raised to make it a viable part of one’s portfolio. Many analysts, however, predict that such an increase will not materialize very soon. At the absolute least, the government will wait a few years to assess how taxpayers will respond to the new tax system. The government is gradually eliminating these deductions to streamline the tax system.