EQUITY LINKED SAVING SCHEME (ELSS)
As the name suggests, ELSS invests majority of investments into equity and equity related assets and hence it is classified as “Equity” mutual fund. It is an open-ended equity mutual fund with income tax benefits under section 80C of the Income Tax Act.
ELSS is considered under “High Risk, High Returns” category of investments. Like other mutual funds, ELSS also offer SIP option.
How does ELSS work?
Invest the lump sum amount by choosing an ELSS fund from one of the mutual fund companies. After 3-years of locking period, you can either withdraw the entire accumulated amount or can leave the amount and let it grow for as long as you wish.
Features of ELSS
- You can invest into equity mutual funds as low as Rs.500. while, there is no limit on maximum investment amount.
- Short lock-in period of 3-years as compared to other investment options like NSC, PPF, FD etc; therefore, fund manager can take long term investment decisions for more returns.
- Ability to generate wealth over long term. One can remain invested and earn returns even after the locking period.
- No exit charges as the investment are locked for 3-years.
Income Tax Benefits
It depends on whether you choose old tax system or new tax system.
In old tax regime, investments up to Rs.1.5 lakhs in a financial year will qualify for tax deduction under section 80C of the income tax act. Dividend received will be added to your income and will be taxed as per your income tax slabs.
If the dividend amount is more than Rs.5000, then the ELSS fund company will deduct 10% of the dividend amount as TDS. There is no long-term capital gains tax on profit up to Rs. 1 lakh. After that any profit is taxed at 10%.
In new tax regime, there is no income tax benefits. TDS will be deducted same as in case of old tax regime.
Drawback of ELSS
- High risk investment.
- ELSS return may vary based on market condition, hence returns is not guaranteed.
- Lock-in period is 3-years hence you can not withdraw before 3-years as there is no partial withdrawal or premature withdrawal options.
Investment option in ELSS
You can opt for one of the following options.
- Growth: This option aims for capital appreciation over long term. The number of units that you bought will remain the same until you sell them. This is suitable for those who expect growth over long term.
- Dividend payout: Dividends are profits made by the mutual fund scheme. This option pays out dividend to investors from time to time; however, dividends amount and the frequency of dividends are not guaranteed. Suitable for those who expect to receive income flow on a regular basis.
See also…
MCQs on Bank & Post Office Deposit Scheme