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Introduction
Equity Linked Savings Scheme (ELSS), as the name suggests, is a mutual fund investment that is linked to the equity market. This scheme is a close ended scheme of mutual funds. These schemes are eligible for a deduction under section 80C of the Income Tax Act, 1961.
The returns under ELSS are the highest among the investments of similar nature that attract a tax deduction under section 80C of the IT Act, 1961 like the PPF, NSC, NPS, etc. Such higher returns are also coupled with higher risks as the fund invests in the equity market which is inherently of higher risk as compared to many of the investment schemes available in the market which are usually backed by the Government of India.
About Equity Linked Savings Scheme
Features of the ELSS
Some of the features offered by the ELSS are mentioned below.
- The investment by ELSS funds is done majorly in the equity market and thereby comprises a majority of their portfolio.
- Such investments do not have the backing or guarantee of the Government.
- Such funds provide dual benefits to the investor in terms of tax savings and capital appreciation from its various investments.
- The scheme has a minimum tenure or a lock in period of 3 years. This is the shortest lock-in period among similar tax saving schemes.
- Investment for a longer period under ELSS enables the investor to get tax exemption on the returns earned.
- Investment in ELSS comes with an option to receive regular dividends via dividend payouts or capital appreciation via its growth option.
- The returns that can be generated by a good and efficient ELSS can range anywhere between 10-12% and is therefore, highest among the other investment options available for the potential investors.
- Another important feature of the scheme is that it does not have any entry or exit load.
- The minimum investment that can be done under ELSS is Rs. 500.
- The maximum investment that can be made under ELSS is Rs. 1,50,000 per annum.
- The investment under ELSS can be made in a lump sum amount or through Systematic Investment Plan (SIP).
- In case the investment under ELSS is done via SIP, the investment made in 1st year is redeemable after the 4th year. Similarly, the investment of the 2nd year is redeemable in the 5th year. The entire investment under ELSS is redeemable after the completion of 3 years from the date of the last investment under ELSS.
Process to Invest under ELSS
As mentioned above, the investment under ELSS can be done either via a lump sum amount or via SIP (Systematic Investment Plan), whichever best suits the investors needs and convenience.
- The investor has to first comply with the necessary KYC norms for investment in ELSS.
- In case the investor has already invested in mutual funds under any of the schemes, the KYC details of such investors are already available with the registration agencies and there is no further need to re-register them.
- An investor who is new to investment in mutual funds and has no prior registration record, can comply with the required KYC norms by registering with the KYC Registration Agencies or any Mutual Fund management Agencies that offer investment in mutual funds.
- An investor needs to provide his/her
- Aadhaar number,
- phone number linked to the Aadhaar account,
- an identity proof,
- an address proof,
- PAN number,
- email address
- bank account details.
- scanned copies of your photograph, identity proof, address proof, aadhaar card etc.
- Investment under ELSS can be done post completion of the eKYC process, however, a person can invest a maximum of Rs. 50,000 per Mutual Fund after eKYC is completed without In-Person Verification (IPV).
- An investor can also do KYC registration offline through various other means like a SEBI registered investment advisor, at banks, Mutual Fund agency offices, etc. but such registration is not prompt or quick as it takes a few days before the details to be validated.
Best time to invest in ELSS
The main purpose of any investment has to be tax savings along with aiding the fulfillment of long term goals. Hence, it is always advisable for the investor to start investment as early as the start of a financial year. This helps the investor to make informed and carefully planned sound investment rather than rushed or rash investment done at the last minute just in an effort to reduce their tax burden.
Investing through SIPs and in a planned manner helps the investor to avoid any lump sum outflows or higher outflows from his/her income every month. This further enables the investor to focus on other investment options available in the market.
The investor gets in the habit of a regular investment with a set or fixed outflow every month which can be altered any time depending up on the needs of the investor.
Comparison between ELSS and other Tax Saving Schemes
| Type of Investment | Lock-in period | Returns | Tax Applicable on Returns |
|---|---|---|---|
5 year bank deposit | 5 years | 6%-7% | Yes |
NSC | 5 years | 7%-8% | Yes |
NPS | Till retirement | 8%-10% | Partially taxable |
PPF | 15 years | 7%-8% | No |
ELSS | 3 years | 10%-12% | Tax free |
FAQs
1. What is the maximum tax benefit available under ELSS?
An investor can get the tax benefit up to a maximum of Rs. 1,50,000 under section 80C of the IT act, 1961 on investment in ELSS.
2. What is the tax implication on the earnings from the ELSS?
The earnings of the investor from the investment in ELSs are tax free.
3. Does the investment in ELSS permit premature withdrawals?
The investment under ELSS does not have a provision for premature withdrawals.
4. Are there any disadvantages of investment under ELSS?
Investment in ELSS also comes with certain disadvantages like, No premature withdrawals like investment under PPF. Investments under ELSS are of high risk in nature and are not suitable for investors who are risk averse.
5. What is the minimum amount that can be invested under ELSS?
The minimum amount that can be invested under ELSS is Rs. 500.