‘Money doesn’t grow on trees…’ most of us may have heard this from our elders at some point. And it’s true. That’s why many of us try to save every penny- be it by taking the bus instead of a cab or bargaining while shopping. And when it comes to saving taxes, it is all the more important to make a careful choice as your hard-earned money is at stake.
Equity-linked savings scheme (ELSS) is a type of mutual fund scheme that can help you save tax and create long-term wealth simultaneously. As per the provisions of section 80C of the Income Tax Act, 1961, ELSS investors can claim tax deduction up to Rs. 1.5 Lakhs p.a. from their gross total income for investment made under ELSS during the financial year. . Moreover, ELSS lock-in period is 3 years, which is the shortest among all tax-saving avenues under section 80C.
How does the 3 years ELSS lock-in period work?
When you invest in an ELSS, you cannot redeem funds until after 3 years. ELSS fund lock-in period can help prevent investors from taking emotional decisions when the market is facing a downtrend and may also encourage long-term investments. But, there is more to this ELSS mutual fund lock-in period:
If you invest in an ELSS fund through Systematic Investment Plan, i.e. SIP, each instalment will be considered as a separate lump sum investment. So, the lock-in of 3 years is calculated separately for each SIP instalment. For example- a SIP in an ELSS fund in January 2023 will be locked in till January 2026, that of Feb 2023 will be locked in till February 2026, and so on. Therefore, the lock-in period for SIP has to be considered while investing .
The investment made in an ELSS fund does not liquidate/redeem automatically after 3 years; the investor can choose when to redeem their investment.
Possible benefits of investing in ELSS?
Apart from saving the tax, investing in an ELSS fund also gives you the following benefits:
Higher growth potential
ELSS tends to offer a better growth potential than other tax-saving options under section 80C - as it helps you earn market-linked returns. Equity, as an asset, tends to provides inflation-beating returns over the long term. Thus, investing systematically and regularly in equity via ELSS can help you build a healthy corpus over the years.
Flexible investment
Unlike other tax saving options mentioned in section 80C of the Income Tax Act, one can systematically invest every month through SIP, with as much as Rs.500 .
Shortest Lock-in period
Yes, you can redeem your investment only after 3 years. This is the shortest lock-in period compared to all other tax-saving avenues covered under section 80C of the Income Tax Act 1961.
Diversification
An ELSS fund invests in companies of diverse sizes and sectors. Thus, the risks associated with a single market cap or sector are balanced out, which may result in building a well-diversified and balanced portfolio.
Lump sum or systematic redemption
You can initiate the redemption process after three years in two ways. Either withdraw the accumulated corpus in one go or choose the systematic withdrawal plan option, i.e. SWP.
So, why miss an opportunity that allows you to save and grow your hard-earned money? Consider investing in an ELSS fund and aim to avail the dual benefit of tax-saving plus wealth creation.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
