Invest in the Equity Linked Savings Scheme (ELSS) to Save Tax effectively
Most salaried individuals are asked to submit investment proofs in the last month of the year. You are not alone if you feel the sword of higher taxes getting deducted from your salary in the next three months hanging around. Your employer must withhold the Tax Deducted at Source (TDS) while paying your salary as defined under Section 192 of the Income Tax Act. (Assumed that the salaried person is in the tax bracket) Besides traditional tax-saving instruments, you can plan to invest in ELSS to maximise your tax savings at this time of the year.
With ELSS investments, you can benefit from the following:
- Maximizing your tax savings to avoid getting significant tax deducted from your next salaries
- Potential for better Returns from your investments
- “Lowest lock-in period amongst various tax saving options available u/s80C.”
- Getting investment proofs timely to be used for tax savings
What Makes ELSS Mutual Funds the Preferred Tax Saving Option for Employees?
An ELSS fund allows you the possibility of creating wealth in the long term while maximising your tax savings under Section 80C of the Income Tax Act 1961.
ELSS funds have the potential to offer high returns than many other tax-saving investments
Their mandatory lock-in period of three years gives your money the time to grow.
You can start investing in an ELSS scheme per month via SIP (Systematic Investment Plan) mode.
There is no upper limit to how much you can invest in ELSS mutual funds (though a maximum deduction of up to Rs 1.5 Lakh from gross total income is allowed as per Income Tax Act)
More About ELSS Funds and Their Features
The major asset allocation of ELSS mutual funds is toward equity and equity-linked securities. This may allow them to generate higher inflation-adjusted returns over a long tenure.
Some of their primary features that attract employees to make investments before the financial year ends are:
ELSS funds offer deductions of up to Rs. 1.5 Lakh from gross total income in a year under Section 80C.
They have no premature exit provisions, helping you maintain investment discipline.
There is no upper capping on the amount you can invest in ELSS, while the minimum investment allowed varies from one fund house to another.
ELSS mutual funds have the potential to offer inflation-beating returns.
Tax Benefits of ELSS Funds
Being an 80C tax-saving option, ELSS funds allow you to claim deduction of up to Rs. 1.5 lakh from gross total income in a year. You should also know that this 80C limit of Rs. 1.5 lakh includes other tax-saving options which comes under 80C you might have already chosen. Besides this, you can choose to invest an amount higher than Rs. 1.5 lakh in a year. The only limitation here is that maximum deduction allowed from gross total income under section 80C is Rs 1.5 lakh in a year.
3 Things to Keep in Mind Before Investing in ELSS
Investment horizon or period
To benefit from creating wealth with ELSS funds, you must choose an investment period of 3years or more. This is because the equity exposure of ELSS schemes requires such a tenure to mitigate market volatility.
The three-year lock-in period of ELSS mutual funds means that the investments will be locked mandatorily from the date of investment. You won’t be able to redeem your holdings until this period ends.
ELSS funds do not guarantee returns at any specific rate as they depend on the performance of underlying securities.
SIP or Lumpsum - Invest in ELSS Funds The Way You Want
It is up to you to decide how you want to invest in ELSS mutual fund schemes. You can invest in them through a SIP (Systematic Investment Plan) that allows you to invest a certain amount every month in the scheme of your choice. This helps you avail the benefit of buying mutual fund units across different market cycles. On the other hand, you can also make a one-time investment in the lumpsum mode in the selected ELSS Funds.