7 things to know about ELSS

An Equity-Linked Savings Scheme (ELSS) is a tax saving mutual fund meant to encourage long-term equity investments. Under Section 80C of the Income Tax Act, the amount you invest in ELSS is deducted from your taxable income up to a limit of Rs 1.5 lakh in a financial year, resulting in significant tax savings.

ELSS is a popular choice among investors because of its tax benefit and potentially high returns, and also because it has the shortest lock-in period of all tax-saving instruments under Section 80C. However, most fund managers will advise you stay invested for longer than that to maximise returns.

It is also important to remember ELSS funds invest in shares, whose prices may fluctuate, so there are no guaranteed returns and fund performance may vary across different time horizons. But on an average over long term, returns have usually been in double digits.

Here are seven things you need to know before you invest in ELSS:

1. Lock-in period:

   ELSS has a three-year lock in period, which means it can only be redeemed after three years from the date of investment. This lock-in period is among the lowest compared with tax saving schemes like Public Provident Fund (15 years), Tax-Saving Fixed Deposit and National Savings Certificates (5 years each).

2. Tax benefit:

   ELSS investments up to Rs 1.5 lakh in a financial year are deductible from your gross income under Section 80C of the Income Tax Act.

3. Tax on returns:

   You must remember that returns on ELSS are considered long-term capital gains (LTCG) on redemption. These gains are tax free up to Rs. 1 lakh in a financial year. You have to pay 10% tax on any LTCG over that.

4. No guaranteed return:

   It is important to keep in mind that returns on ELSS are linked to the fortunes of the stock market, so they are not guaranteed. Even though the lock-in period is much shorter than other schemes, you benefit by staying invested for the long-term, since you get the best returns from equity over the longer period.

5. Best for beginners:

   For a beginner, an ELSS investment is a good way to get into the stock market as the funds are professionally managed and have a mix of large and medium-sized stocks to ensure diversification and reduce risk. The tax benefit is the icing on the cake.

6. SIP option:

   One of the best things about ELSS is that you can invest small amounts each month through a Systematic Investment Plan (SIP). For example, instead of investing Rs. 1.5 lakh at one go to save tax, you could invest Rs. 12,500 each month instead. Each instalment of SIP will be locked in for three years.

7. Above average returns:

   ELSS funds invest in equity, which have earned higher returns than most other asset classes over the longer period.

In short, ELSS is a potent tax saving scheme, with a shorter lock in period.  Open a trading account with ICICIdirect to invest in mutual funds, IPOs, insurance and more.