What is ELSS?

 

 What is ELSS?

 

ELSS schemes function in accordance with ELSS guidelines

issued by CBDT under Section 80C of the Income-tax 

Act, 1961 to provide tax savings on investments in equities. 

The amount you invest in ELSS is deducted from your taxable income. 

This way, you lower the amount of income tax you need to pay.

 

The ELSSS Advantage

 

For the uninitiated, ELSS is a type of mutual fund

Investment that qualifies for tax deductions. It is like any

other mutual fund, but invests at least 80 per cent of its

assets in equity and equity-related products to qualify

for tax deductions under Section 80C of the

Income-tax Act,1961. ELSS schemes are 

typically open-ended. Investors can subscribe

to the fund on any day. These investments come with a

Three - year lock-in. With the growth potential of Indian

equity markets from a long term perspective,

Investments in ELSS to save taxes could just turn your

wealth creation dream into reality.

 

Diversification

 

ELSS being an equity mutual fund is well

diversified, making it a suitable option for every

investor looking to save taxes and also invest in

equities. Diversification is a simple philosophy

that rests on the fact that all investments dont

do well simultaneously. An equity mutual fund

provides instant diversification because the

 

money invested by a fund is spread across

different investments such as companies from

different sectors across market capitalizations.

 

Lock-in

 

ELSS has the shortest lock-in of three years under

Section 80C of the Income-tax Act, 1961, which

makes it the most liquid among tax-saving

options. In comparison, the fixed return PPF has a

15-year lock-in with the flexibility of partial

withdrawals from year six. One can borrow

against the PPF, but it still does not match the

 

short lock-in that ELSS offers. Even other tax

 

savers such as insurance plans have long tenures

and so does the mandatory provident fund

deduction. If liquidity is priority while saving tax,

ELSS is a go-to option.

 

Flexibility

 

There isa natural convenience built into investing in

ELSS: You can invest by filling up a simple form or

even online with direct debit from your bank account.

Like other mutual funds, you can invest diligently

through SIPs, which help you stagger your

investments. Most importantly, you can invest small

sums through the year instead of investing large sums

at one go. Likewise, at the time of redemption, you

need not redeem all the units after the lock-in, you can

cash-in as much as you need and let the rest stay invested.

 

Equity Exposure

 

Compared to other options available under Section 80C of

the Income-tax Act, 1961, ELSS is the only equity-oriented

tax-saving option. This is perhaps the most underrated

benefit of ELSS, especially when taken into account

the fact that equity is the only asset class that beats

inflation in the long run and builds real wealth. This

factor alone makes the case for ELSS that much

 

stronger than other available options. Of course, like

every other equity instrument, an ELSS also runs the risk of

market volatility and loss. Over the long term, these risks are

reduced.

 

Taxation on  ELSS

 

The investments in ELSS of up to 1.5 Lakh in a

financial year qualify for deductions under Section 80C

of the Income-tax Act, 1961. After the mandatory three

 

year lock-in, the gains from the investments are taxed

as long-term capital gains. Any dividend income

earned on ELSS investments is subject to dividend distribution tax.

 

Transparent

 

Investments in ELSS are open, in the sense, each month

 

the AMC releases the portfolio in which the fund has

 

invested for one to know the type of stocks which their

 

investments are in, the sectors, and the exposure in

 

debt and cash. Mutual funds are regulated by the

 

stock market regulator SEBI, which mandates the

release of daily NAVs of the fund, indicating the value of

one's investments each day. While the lock-in is applicable

 

1or three years, one can still track the performance of their

 

investments in these funds

 

Professional Management

 

ELSS takes the difficult aspect of managing equity

 

investing from you. There are scores of firms and

sectors to track and several factors that impact the

 

economy and markets. For instance, a change in

interest rates will impact stock prices of companies of

 

certain sectors that are rate dependent. The role of

professional fund management ensures you do not

face the task of making decisions. Mutual funds

 

employ professionals who manage investments on a

full-time basis with expert research resources. The cost

of professional management is shared mutually among

all the investors in a fund.

 

Decoding Savings

 

Depending on the tax bracket that you

fall in, the savings on taxes vary and

range from 7,000 to T47,000 in a year by

investing in instruments that qualify u/ss

80C of the Income-tax Act, 1961.

 

Changes in savings*

under different brackets:

 

R7,800 under the 5% tax bracket

 

31,200 under the 20% tax bracket

 

R46,800 under the 30% tax bracket

 

*Calculated for individuals with age less than 60. For the 30%

tax bracket, income is assumed to be less than R50 Lakhs.

 

Working
Tax Bracket	Income deducted	Tax Rate	Tax Saved
5%	150000	5.2	7800
20%	150000	20.2	31200
30%	150000	31.2	46800

 

 

Note. The tax calculation shown above are as per income-tax slab applicable to  individual assesses for FY-2018- 19, inclusive of health & Education and exclusive of surcharge