Mutual funds have gained popularity and have become investors’ choice when it comes to investing for the fulfillment of financial goals. It is comparatively easier to understand about mutual funds and invest your hard earned money in them.
What’s better for the investors is having the benefit of saving on taxes along with earning returns.
When we talk about mutual funds that help the investors in saving on taxes, ELSS or Equity Linked Savings Scheme tops the list and it surely a good choice.
What is ELSS?
ELSS or Equity Linked Savings Schemes are open ended mutual funds which belong to the category of equity mutual funds. ELSS comes with the sual benefit of capital appreciation and tax saving.
The investors investing in ELSS can save up to INR 1,50,000 under section 80C of the Income Tax Act.
Since they belong to the category of equity mutual funds, 65% of the money is invested in equities or stocks and has two options of investment i.e., Growth and Dividend.
Features of ELSS:
- Lock in period: The other tax saving instruments in the market like FDs, NPS, PPF etc have a minimum lock-in period of 5 years. ELSS offers the benefit of tax saving with the minimum lock-in period of just 3 years. This means that you cannot withdraw the amount of money invested by you before a period of 3 years.
- Tax Saving: ELSS comes with a tax saving benefit of up to INR 1.5 lakh under section 80C of the Income Tax Act. The investors can choose to invest either in growth or dividend ELSS depending upon their financial goals.
In growth ELSS option, the amount of investors is re-invested and keeps of growing until and unless it is redeemed whereas in the dividend option, dividend is paid to the mutual fund investors which are taxable.
Advantages of ELSS
- It comes with a minimum lock-in period of just 3 years.
- The portfolio in which the money of the investors is further invested remains transparent.
- After the completion of the lock-in period, 100% money can be withdrawn by the investors.
- You can invest either through an SIP or in lump sum depending upon your preference.
- It earns better returns in comparison to other tax saving instruments like FDs, PPF etc.
- ELSS is a good investment vehicle for new investors as the money is managed by an expert fund manager.
- There is no maximum limit on the amount you can invest in ELSS and can thus invest as much money as you want.
Disadvantages of ELSS:
- It is not suitable for conservative investors who do not want to be exposed to equity as it is equity linked investment option.
- The amount of money received after the lock-in period is taxable as a long term capital gain.
- You cannot withdraw the funds before maturity.