What is Equity Linked Saving Scheme (ELSS) in mutual funds?

Equity-Linked Saving Scheme (ELSS) is a unique investment option that aims for potential wealth creation while also offering tax benefits under the provisions of Section 80C of the Income Tax Act, 1961. ELSS primarily invests the major corpus of money (minimum 80% of the portfolio) in equities and equity-related securities.

Furthermore, these funds have the shortest lock-in period among all tax-saving investment options. The mandatory lock-in period for ELSS is just three years. This means that your money is invested for a relatively short duration compared to other options like PPF, National Savings Certificate (NSC), and Fixed Deposits, which have lock-in periods of 15 years, 5 years, and 5 years, respectively.

In recent years, many salaried investors have opted for ELSS funds for tax benefits. After the lock-in period is over, the units can be redeemed or switched, or you can also continue your investments for long term wealth creation.

Tax benefits offered by ELSS mutual funds

Understanding the tax benefits offered by ELSS mutual funds can help you save taxes and reduce tax burden. Here’s a quick overview of the same.

Tax deduction under Section 80C

Investments in ELSS funds are eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. So basically, the amount you invest in ELSS can be subtracted from your total taxable income, thereby reducing your tax liability. For example, if your total taxable income is Rs. 6 lakh, and you invest Rs. 1.5 lakh in ELSS, your taxable income will be reduced to Rs. 4.5 lakh, resulting in lower tax payable.

Factors to consider before investing in ELSS Funds

Before starting your investment in ELSS funds, it is important to keep the below-mentioned things in mind. It can help you align your investments with your tax-saving objective. Investment and tax planning

Though ELSS funds offer both equity market exposure and tax benefits, it's advisable to look at them as an investment tool rather than just a tax-saving instrument. Ensure that your investment strategy covers both your financial objectives and tax planning needs. ELSS funds can play a significant role in achieving long-term financial goals beyond tax savings.

Choice between SIP or lumpsum

Many investors rush to invest in ELSS funds near the end of the financial year to avail themselves of tax benefits. Consequently, they often commit their entire investment in a lumpsum. This approach can be risky, especially if you invest when the market is at a high point. Since ELSS investments are typically intended for long-term financial goals, consider starting a systematic investment plan (SIP) at the start of the financial year instead of making a lump sum investment.