In India, March is tax month - give or take! Saving taxes can be challenging for many working professionals. In this story, we will tell you all about a powerful tax-saving investment option, ELSS funds.
We will look at factual information and help you understand how an ELSS fund works, what it’s benefits and negatives are, along with how it can help you save tax while simultaneously creating wealth.
What Are ELSS Funds?
Equity Linked Savings Schemes (ELSS) funds invest in equity or stocks, as they are commonly known. Thus, ELSS funds fall under the equity mutual funds category.
ELSS funds offer an important benefit besides a lucrative return potential- they help you save tax. Under Section 80C of the Income Tax Act (1961), an investor can claim tax deductions up to ₹1,50,000 by investing in ELSS funds.
ELSS funds come with a lock-in period of 3 years. However, this is the shortest lock-in period of any tax saving investment option under Section 80C.
Benefits Of ELSS Funds
#1. Tax Exemption (up to ₹1,50,000)
As mentioned before, an investment of up to ₹1,50,000 in ELSS can help you save taxes under Section 80C. This simply means that up to ₹1,50,000 of your total taxable income will be exempt from taxes.
It's important to note that the principal amount is tax-exempt, not the gains.
#2. Potentially High Returns
ELSS funds don't just help you save taxes, they have the potential to generate lucrative returns over the course of the lock-in period. This is mainly because they invest in shares.
Mutual Fund Name
#3. Low Long Term Capital Gains Tax
LTCG on ELSS funds is taxable at 10% on profits above ₹1,00,000 held for more than a year. This may be viewed as a benefit since the principal is still tax-exempt and the LTCG tax is less than that on debt funds.
Risks Of ELSS Funds
#1. Market-Linked Instrument
ELSS funds invest in the share market and thus, carry market-related risks just like any other equity mutual fund. They may be prone to short term fluctuations and volatility.
However, letting experts like Wealth First pick ELSS funds for you on the Cube Wealth app based on your risk profile and investment goals can help you mitigate risk.
#2. Minimum Lock-in Period
ELSS funds come with a minimum lock-period of 3 years. Thus, ELSS funds naturally become a mid to long term investment option. However, this is the shortest lock-in period of all tax-saving investments under Section 80C.
Tax Saving Fixed Deposit
National Pension Scheme
Public Provident Fund
Factors To Consider Before Investing In ELSS Funds
1. Your Investment Goals
Investors often fall into the trap of investing in assets that may not work for them purely because it can help them save tax. ULIPs are a classic example of this phenomenon.
You must zero-in on your investment goals and understand how ELSS funds fit into the picture. To start with, you can take the detailed risk analysis quiz on the Cube Wealth app to learn more.
2. ELSS Fund Returns
At the end of the day, ELSS funds are not just tax-saving investments. They can help you create considerable wealth over the course of their lock-in period.
Thus, you must pay attention to the fund returns. But that's not enough. Past performance alone does not guarantee future success.
That's where a reliable app like Cube Wealth steps in and gives you access to top-performing mutual funds for the future as advised by Wealth First.
3. Expense Ratio
An expense ratio is a fee that you'll pay for the services of the fund manager. A higher expense ratio means you'll have to pay a higher share of your profits to the fund house. In India, SEBI has capped the expense ratio that a fund house can charge at 2.5%.
How To Save Tax By Investing In ELSS Funds?
Step #1: Know Your Taxable Income (Net income)
For this, you'll need to calculate your gross annual income. It'll include your salary, bonus, etc. Then, subtract your deductions (medical reimbursements, House Rent Allowance, Transport Allowance) from it. That will be your taxable income or net income.
Step #2: Understand The Tax Rate
Once you know your taxable income, you'll need to understand how much taxes you'll have to pay. This will be based on your income tax slab.
Income Tax Slab (in lakhs)
Income Tax Rate
Now you know exactly how much tax you'll have to pay. It's time to save tax!
Step #3: Download The Cube Wealth App
On the Cube Wealth app, you'll get access to a handful of the top ELSS mutual funds. Our mutual fund advisor, Wealth First, has narrowed the list down so that you can focus on saving taxes and creating wealth rather than mull over the numerous ELSS fund options.
Step #4: Invest In Tax Saving ELSS Funds
You can choose the ELSS fund that suits your needs and risk profile by taking the simple risk analysis quiz. Cube Wealth gives you the option to start a SIP or invest one-time based on your tax saving and/or wealth creation needs.
Ans. An Equity Linked Savings Scheme (ELSS) is an equity mutual fund that may help investors save tax by claiming a deduction of up to ₹11.5 lakhs. The lock-in period on ELSS funds is 3 years.
2. What happens if you redeem ELSS before 3 years?
Ans. There is no scope of redeeming your ELSS mutual fund investment before 3 years as it is a mandatory lock-in period that investors must adhere to.
Planning your investments wisely with a reliable app like Cube Wealth may help you negate this. Moreover, you can opt for a loan against your ELSS investments.
Watch this video to understand the benefits of long term investments
Shriram is a Consultant at CubeWealth. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. His love for philosophy, developing products, and empowering people through quality content is what got him to CubeWealth.
Top 5 Reasons To Try Our Powerful Investment App!
Schedule a call based on your convenience. And get an expert to help you invest.
on stock picking, poring over excel sheets, financial news, analyzing market trends, tracking the Sensex, researching company fundamentals, comparing mutual funds, reading financial reports, trying to predict the future & losing your sanity!