When planning an investment and making one, questions regarding the benefits obviously pop up. Each investor for once will surely think of which mutual fund to invest in, so as to reap the maximum benefits, especially to save tax under section 80C. Surely, mutual funds can be a tax-efficient investment that can further reduce the tax burden and can contribute towards increasing your wealth. Equity Linked Saving Schemes (ELSS) is amongst the most ideal tax-saving instrument that offers an easy option to obtain tax benefits and an opportunity to harness the potential of investing in the equity market. The government too, in order to encourage more funds under the tax saving schemes, allows tax exemption.
ELSS (Equity Linked Saving Scheme), as the name suggests is an equity-linked scheme that helps you to primarily invest in equity shares. Where 80% of the fund amount falls into equity shares and the leftover 20% is managed under other different mutual fund saving securities. Well in terms of investing, often people get confused between Equity Mutual Funds (EMFs) with ELSS, which is not the case. While the normal EMFs can right away be bought and sold, on the other hand, ELSS offers a compulsory 3 years lock-in period. The lock period implies that your money cannot be withdrawn any time before the span of 3 years. Many investors are apprehensive about blocking their money, due to the restriction of time span and there are other few who fear the loss of money in case of losses. But since these funds go into the equity market, the gains obtained are long-term capital gains. And so far, ELSS is the best tax-saving mutual fund scheme that promises high returns and is popular amongst investors out of several kinds of investment options available in the market. So, if Public Provident Fund (PPF) and National Savings Certificate (NSC) fetch you 8% to 9% returns, ELSS funds can get you about an average of 20% to 25% that too along with the tax benefit and you pay no tax on your gains either. Also while PPF has a lock-in period of 15 years and NSC with a lock-in period of 6 years when compared to only 3 year lock-in period of ELSS.
Broadly defining the tax-saving benefits of investing in ELSS are as follows:
– Investment in ELSS schemes makes you eligible for deduction from taxable income under Section 80C of the income tax act.
– In comparison to the traditional investment instruments like PPF, and NSC under section 80C of the income tax act, ELSS funds have the shortest lock-in period of 3 years.
– Under the ELSS scheme the dividends earned during the investment period are tax-free and the profits on the sale of ELSS units are treated as long-term capital gains and are not subject to tax.
– ELSS funds invest a larger portion of funds in equity, which despite short-term volatility has the potential to build wealth over the long term.
Author Bio – Having varied interests and diverse knowledge, Himani Arora writes articles for several sectors and categories in personal finance, tax saving mutual funds and investments for reliancemutual.com