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Many first-time investors use ELSS funds for twin benefits to save tax and take exposure to equity as an asset class. Investments in these schemes are locked in for 3 years, from the date of investment.
As the financial year draws to a close, investors are scouting for options to save tax under Section 80C. An investor can get a tax benefit of up to Rs 1.5 lakh by investing in an Equity linked savings scheme (ELSS).
ELSS is a type of mutual fund scheme that primarily invests in equities. By investing in such a scheme investors can save tax up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Many first-time investors use ELSS funds for twin benefits to save tax and take exposure to equity as an asset class. Investments in these schemes are locked in for 3 years, from the date of investment. After the lock-in period ends, one is free to sell them or can continue to hold on.
ELSS funds work like diversified equity funds and have the flexibility to invest in a mix of large-, mid- and small-cap stocks. The performance is benchmarked to an index. Most schemes are actively managed and adopt a flexicap approach while managing this fund, with the industry just having one passive fund. Some schemes also invest in a mix of mid- and small-cap stocks. Investors can make a lump sum investment or can stagger investments using systematic investment plan (SIP). An investment can be made in one scheme or in multiple schemes. The minimum investment amount in a scheme is Rs 500.
One of the biggest advantages of ELSS is the lower lock-in period of three years. In comparison, other products such as a tax-saving bank FD and the post-office National Savings Scheme have lock-in of 5 years, while the public provident fund (PPF) needs investors to stay invested for 15 years. Returns from ELSS are market linked and it has the potential to generate higher returns in the long term when compared with fixed income products. Over the last 10 years, these schemes have delivered an average return of 14.59%, as per data from Value Research.
Capital gains from ELSS get the same treatment in Income Tax calculation as equity instruments. Long term capital gains (LTCG) are taxed if the gains exceed Rs 1 lakh in a financial year and at 10% on the amount exceeding Rs 1 lakh.