Choose ELSS for good returns along with tax savings
6 min read
Investment in ELSS (Equity Linked Savings Scheme) is an option for investors willing to take risks for tax savings.
Since ELSS investments are in shares, they come with market risk. However, their returns are the best in the long run.
Among the tax-saving options available in income tax,
ELSS has the shortest lock-in period of three years.
Equity funds should ideally be invested in for a minimum of five years. Typically, within five years, the market completes one cycle. The longer the investment period in shares,
the lower the associated risk.
Funds that have performed better after market ups and downs or different cycles can be chosen for investment. During this tax-saving season, most ELSS schemes announce hefty returns.
Investors should not be tempted by this and should opt for growth options instead.
How to invest in ELSS?
There are several options for investing in ELSS. The first and traditional method is through mutual fund agents. Besides, Demat account holders can directly purchase them. Various asset management companies also facilitate investment in funds through their websites. Some websites, like FundsIndia.com, also allow investment in ELSS funds. But before investing,
don't forget to complete your customer formalities.
Investing in ELSS for Tax Saving
Under section 80C of the Income Tax Act, investments up to one lakh rupees can be made in various tax-saving schemes like life insurance plans, Public Provident Fund (PPF), Employee Provident Fund, Equity Linked Savings Scheme (ELSS), tax-saving fixed deposits, National Pension System (NPS), etc. All these are savings-related schemes, and people rely on them first.
In terms of returns, ELSS has performed the best over the long term.
Choose ELSS for Risk-Taking
Investment in ELSS is an option for investors willing to take risks for tax savings. Since ELSS investments are in shares, they come with market risk. Among the tax-saving options available in income tax, ELSS has the shortest lock-in period of three years. But that doesn't mean it's only invested for three years. Equity funds should ideally be invested in for a minimum of five years. Typically, within five years, the market completes one cycle.
The longer the investment period in shares, the lower the associated risk.
How to Choose Good ELSS Funds?
There are more than 40 funds in the ELSS category. It is advisable to choose funds with a better track record for investment.
Funds that have performed better after market ups and downs or different cycles can be chosen for investment. During this tax-saving season, most ELSS schemes announce hefty returns. Investors should not be tempted by this and should opt for growth options instead.
Returns from ELSS are generally obtained from dividends and are, therefore, tax-free. Since there is no tax on long-term gains, the capital gain is also tax-free.
Investment through SIP in ELSS
If you have invested in ELSS through SIP and some installments have completed the three-year period,
you can start a new SIP so that you can reinvest in the units that have completed 36 months. If the investment is made lump sum and the three-year lock-in period has been completed,
the units should be redeemed together, and investment should be made again with the same amount. By recycling your ELSS, you can take advantage of tax savings. Upon withdrawal, Securities Transaction Tax (STT) is applied to the redeemed amount.
However, due to STT on the redeemed units, there is no complexity related to tax. Currently, tax relief is available on the transfer of equity shares and profits received from equity-oriented mutual funds according to certain conditions.
The first condition is that investment must have been made in shares or equity-oriented funds for at least one year. The second condition is that STT should be levied on the transfer-related transaction.
Both conditions must be met. Mutual fund companies will levy STT on the redemption of your old units, and since you want to recycle your ELSS units, all capital gains will be tax-free.
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