Strategic investors with a good knowledge of market dynamics and a risk-tolerant attitude often find Equity-Linked Savings Schemes (ELSS) to be an attractive investment option. Unlike traditional tax-securing investments, ELSS offers higher returns to its investors. It is a mutual fund scheme that primarily deploys investor’s money in the form of equity across different industrial sectors or stock markets. ELSS scheme with tax benefit is called the tax-saving mutual fund as it can get you Rs 1.5 lakh annual tax exemption under the Income Tax Act, 1961.
In recent years, the ELSS has become immensely popular among regular investors interested in equity funds. However, the ELSS tax benefit scheme demands a lock-in period of three years, meaning you won’t be able to redeem your investment before this. The profit that you make at the end of three years will be considered your LTCG, or Long Term Capital Gains. Is ELSS taxable after 3 years? Yes, if you hold ELSS investments for more than three years, they are categorized as Long-Term Capital Assets and you have to pay LTCG tax at the rate of 10% on gains exceeding Rs. 1 lakh. Let’s dig in to learn more about the scheme.
Benefits of ELSS
Equity-Linked Savings Scheme is a brilliant product that combines the benefit of equity mutual funds with tax exemption. Apart from tax deductions, ELSS comes with the benefits of potentially high returns and a shorter ELSS lock-in period.
– Tax Benefits
The USP of ELSS is the tax deduction it offers under Section 80C of the Income Tax Act, of 1961. With this mutual fund investment, investors can save up to Rs. 1.5 lakh from their total taxable amount annually. The reduction in tax liability makes this a comparatively profitable investment for share investors.
– Shortest Lock-in Period
Equity-Linked Savings Schemes have only 3 years of mandatory ELSS lock-in period. This is the lowest of lock-in periods compared to the other tax-saving investment options under section 80C. If you compare it with the Public Provident Fund (PPF), its lock-in period is 15 years. At the same time, NSC or National Savings Certificate offers a 5-year lock-in period. Therefore, ELSS is the clear choice for investors as it enables them access to their investments sooner. Essentially, with your investment in ELSS, you are getting the benefits of tax reduction with easy access to your money.
– Chances of Higher Returns
In ELSS, you invest in equity or equity-based instruments. This means your investments will be subject to market fluctuations. If the market situation is favorable, your investment can generate higher returns than other tax-saving options, including Public Provident Fund (PPF) and Fixed Deposits.
– Lower Investment Options
You can start investing in the ELSS with a minimum amount of Rs. 500 per month. If you are a steady investor with limited disposable income, ELSS will be beneficial for you. The lower investment limits of ELSS make it all the more attractive as it lets you save tax and diversify your portfolio. This benefit of ELSS makes it suitable for investors or taxpayers with a fixed regular earning.
– Potential for Long-term Return
With the ELSS scheme tax benefit, you can invest for the long term. In fact, such long-term investment in mutual funds lowers risk. Since you are investing in equities, the remaining patience will fetch you a good return.
Calculation of tax on ELSS schemes
Determination of tax on ELSS under LTCG is imperative if the investor is interested in knowing the returns on investment for long-term investment plans. Since ELSS funds are essentially equity-oriented mutual funds, they fall under the ambit of LTCG tax. This simply means that the investor is taxed on the profit that is made on the sale of the ELSS units held for more than three years. The first step an investor has to do when calculating the LTCG tax is to determine how much was made from the particular investment.
For instance, if an investor invested Rs 2,00,000 in an ELSS mutual fund and the investment value increases to Rs 3,50,000 after three years, the LTCG applicable will be Rs 1,50,000. This is done by deducting the initial cash investment of Rs 2,00,000 with the final balance amount of Rs 3,50,000. LTCG at the rate of 10% is levied on capital gains over Rs 1 lakh in a financial year.
It is important for the investor to understand the tax treatment as it would impact the total return from investment in ELSS. Despite LTCG tax implementation, ELSS is a popular investment instrument as it provides higher returns compared to other tax-saving instruments. The taxation of ELSS gains is slightly low compared to tax rates that apply to other forms of capital gains or income. This makes the ELSS scheme tax benefit attractive to investors.
Key Takeaways
To summarize, the ELSS scheme tax benefit is highly sought after by investors who are on the lookout for tax savers that help in wealth creation. As far as the perks are concerned, one of the biggest would be the tax benefits under Section 80C of the Income Tax Act of 1961. ELSS investment falls in the category of tax-saving investment. Further, it is the only category of mutual fund that qualifies for tax benefits.
ELSS also has the least lock-in period of three years, lower than any other tax-saving investments falling under Section 80C. ELSS offers a lot of flexibility compared to other tax-saving instruments such as PPF and NSC.
Besides, ELSS is quite popular among investors as it requires only a minimum investment. You can invest in ELSS starting with as low as Rs 500 every month through SIP, lowering the entry barrier for investors. Furthermore, the SIP route enables investors to enjoy the advantage of rupee cost averaging, besides reducing downside risks.
Finally, ELSS investment can help to build a corpus. Though the ELSS lock-in period is 3 years, investors can stay invested for longer. That said, long-term investments will likely be more beneficial thanks to compounding effects and potential further asset valuation. Equity as an asset class has long-term fundamentals and holding on to ELSS units for a longer term will help investors to get more returns out of it and minimize short-term volatility. Due to this, ELSS is suitable for achieving long-term goals such as post-retirement planning, children’s marriage, or owning a house.
Conclusion
Equity-Linked Savings Schemes (ELSS) offer great tax savings, potential for high returns, and flexibility. Compared to other tax saving instruments, the ELSS scheme tax benefit makes it stand out. For investors who wish to diversify investments, achieve financial goals, or want to minimize their tax liability, ELSS turns out to be a robust product in today’s volatile financial market.
