Tax planning should be an integral part of your finances. There are various deductions available to an individual as per the Income Tax Act, 1961. One such instrument is Equity Linked Savings Schemes (ELSS).
As the name suggests, ELSS is an equity mutual fund scheme similar to any diversified equity mutual fund that routes your investments into equity markets. One major advantage of this scheme is the tax advantage available to investors.
Tax deduction available
Individuals investing in ELSS get tax benefit under Section 80C of the Income Tax Act, 1961. The maximum amount you can claim as deduction in a financial year by investing in ELSS is Rs. 1,50,000/-.
Lock in period
ELSS comes with a lock in period of 3 years unlike other kinds of mutual funds schemes which can be redeemed by the investor at any time, subject to exit load as applicable. This lock in period is shorter than other products under Section 80C. You shouldn’t just invest in this scheme for the purpose of tax savings but link it your long term goals. This can help you create a corpus for the same.
Growth or dividend
As an investor you can invest either in the growth or dividend option of this scheme. If you require your capital to grow, you should opt for the growth option.
Unlike a growth plan, an investor gets payouts from the dividend option. If liquidity is your concern you should opt for the dividend option. Do keep in mind that there is no guaranteed payout of dividend. The dividend is paid at the discretion of the fund manager*.
There is no fixed return guaranteed by this scheme. As it is an equity linked product, the returns are market linked. Hence, before investing in this scheme, you should do a thorough research related to past performance** based on risk and returns including how has the fund performed compared to its benchmark and its peers, the annual expenses and the charges of the fund.
Lump sum or SIP
You can invest via a lump sum or through SIP’s (systematic investment plan). When investing through a SIP, do keep in mind that every new investment will be locked in for a period of 3 years. For instance, an SIP of Rs 5000 made at 1st January 2017 can be redeemed only on 1st January 2020. The next SIP made on 1st February 2017 would complete its lock in period of three years on 1st February 2020 and so on.
* Dividends are subject to availability of distributable surplus and approval of Trustees.
**Past performance of the Sponsor/Mutual Fund/Investment Manager are not indicative of the future performance of the Scheme(s).
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.