The equity-linked savings schemes have become a very popular tax-saving choice for Indian investors over the past few years. The appeal of this product is that, in addition to saving you money on taxes, it also builds wealth over time. A 3-year time is substantially shorter than other Section 80C products like PPF, NSC, long-term deposits, etc., for an ELSS.
ELSS: What is it?
The Equity Linked Savings Scheme (ELSS) is an equity-focused mutual fund offering investors tax advantages. According to its name, this mutual fund scheme invests a significant portion of its corpus in securities that pertain to equity. The terms “ELSS” and “SIP” are interchangeable since SIP allows investors to purchase fund scheme units over time rather than all at once. Additionally, a 3-year lock-in period is required for certain funds.
Characteristics of ELSS
Before placing their money into any plan, investors must be aware of its key components. Before investing, it's also crucial to take into account the key characteristics of ELSS:
- ELSS is a sort of mutual fund plan, not an alternative investing strategy to mutual funds. Furthermore, it is not a replacement for SIP; rather, it is a SIP that saves taxes.
- It is a mutual fund that invests in stocks and related money market products, with around 80% of the fund's corpus going into stocks.
- It is the only mutual fund or SIP that offers tax advantages.
- A minimum 3-year lock-in period is included with ELSS funds. Comparing this tax-saving investment plan to fixed deposits (FDs) and other tax-saving plans, it has the shortest lock-in period. ELSS is riskier than other tax-saving schemes, nevertheless.
- Long-Term Capital Gains (LTCG) taxation is applied to the gains from ELSS.
- The tax advantages include a Section 80C of the Income Tax Act exemption of up to Rs. 1.5 lakh for a fiscal year. Additionally, long-term capital gains are excluded up to Rs. 1 lakh and are taxed at 10% above that, according to the rules for taxing equity funds.
Benefits of ELSS Mutual Funds
The advantages of ELSS mutual funds are substantial and prove helpful to both new and experienced investors. Therefore, understand the benefits of purchasing ELSS at the earliest.
- ELSS funds are a wonderful choice for investors looking to diversify their investment portfolio because they invest in a variety of businesses of all sizes and industries.
- With just Rs. 500, you can quickly start investing in an ELSS fund. It's a huge relief for novice investors to learn that you may start accumulating wealth with a relatively tiny initial investment.
- An ELSS fund's three-year lock-in duration ensures that you are saving proactively while also keeping the lock-in time brief enough to allow you to access liquid money as needed.
Types of Equity Linked Saving Schemes
Growth Option: With the growth option, the holders have no dividend benefits. Benefits are only distributed to holders once the ELSS's duration is up, and they serve to raise your NAV and hence multiply your gains. The state of the market will determine how much money an investment makes.
Dividend Option: With the dividend option, investors benefit from regular dividend payments rather than a lump sum payment at the term's end. The investor will receive the full amount of any dividends received under this option, which are tax-free.
Dividend Reinvestments: Under this option, a holder will have the choice to return any dividends received because doing so will increase the NAV value. This option is frequently chosen by investors, particularly when the market performs well over the course of the lock-in term of three years.
Benefits of Investing in ELSS – Equity Linked Savings Schemes
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