Invest in Equity Linked Saving Scheme (ELSS) to avail tax benefit under Sec 80C.
According to Income Tax Law in India, every taxpayer is eligible for savings under Section 80C up to Rs. 1,50,000. The guidelines for ELSS investment are laid out by The Association of Mutual Funds in India (AMFI) and the Securities and Exchange Board of India (SEBI).
ELSS funds are diversified mutual funds with most of the corpus invested in equities. These funds typically attract higher returns when the stock market fares well, but also carry all the risks of investing in equity.
While the minimum amount that can be invested in ELSS is Rs 500, there is no cap on the maximum you can put in. These investments come with a three-year lock in period and can be withdrawn completely on completion of the stipulated time.
Any investment towards this fund up to Rs 150,000 is eligible for tax deduction under Section 80C of the Income Tax Act. The returns received on maturity of the plan is not taxable as well. This is because there is no long term capital gains tax on equity investments, and with its three-year lock-in, ELSS funds automatically complete the one-year period beyond which equity investments become tax-free.
ELSS funds have both dividend and growth options. In the dividend option an investor is entitled to dividends even during the lock-in period. In case of growth funds, the investor gets a lump sum once the lock-in period is over.
ock in period of 3 years.
Option to invest through Systematic Investment Plan (SIP).
The income on the redemption of ELSS units is treated as long-term capital gain , and is not subject to taxation.
ELSS is suitable for investors who want:
An opportunity to earn competitive returns and potential to earn tax-free dividend.
To invest for a shorter tenure of 3 years as compared to other investment options that qualify for Sec 80C
Advantages of ELSS funds
The ELSS maturity amount is tax free
ELSS allows high capital appreciation in a short period of time. Some of the best ELSS funds have provided 20% returns annually in the last five years.
The dividend funds fetch gains during the lock-in period and the dividends on equity investments are tax free.
ELSS encourages investors to stay invested over long time to see best results.
Disadvantages of ELSS funds
Being a market-linked investment, there’s a higher level of risk involved compared to instruments such as PPFs and bank deposits.
An ELSS fund cannot be closed by premature withdrawal, so there’s limited liquidity.