Equity Linked Saving Scheme (ELSS)

Equity Linked Saving Scheme (ELSS) | Benefits and Concerns on Equity Linked Saving Schemes

Equity Linked Saving Scheme (ELSS): ELSS, commonly known as Equity Linked Savings Scheme, is a varied, unlimited, equity-oriented mutual fund scheme.

In the Equity Linked Savings Scheme, 80 percent of the portfolio amount is a must requirement for investment in equity funds.  You must hold a minimum lock-in period of three years from the date of allotment of units to invest in the scheme.

In recent times, the Equity Linked Savings Scheme has become one of the most in-favour tax-saving options invested by many.

This article will guide you through the benefits and concerns regarding Equity Linked Saving Scheme.

A Brief On Equity Linked Saving Scheme or ELSS

An equity-linked savings scheme is the only kind of mutual fund that falls eligible for tax deductions under the provision of Section 80C of the Income Tax Act, 1961.

In this scheme, you can claim a tax rebate of up to Rs 1,50,000 and save up to Rs 46,800 a year but only by investing in mutual funds.

ELSS funds offer potential inflation-beating returns in the tax-saving investment.

An equity-linked savings scheme portfolio comprises equities, while they hold some exposure towards fixed-income securities.

Benefits Of Investing In Equity Linked Saving Scheme (ELSS)

A few benefits of investing in ELSS schemes are as follows-

Tax Benefit

An individual or HUF can claim a deduction from the total pay package. The amount claimed can be up to Rs. 1.5 lacs under the Income Tax Act, 1961.

Equity Linked Saving Scheme refers to tax-saving mutual funds. This scheme falls under Exempt-Exempt-Exempt, the EEE status.

EEE or Exempt-Exempt-Exempt status refers to the amount that can be invested, income-earned and undergoes maturity proceedings and those which are exempt from income tax.

  • For the Income Earned category, the dividend received from the Equity-linked saving scheme is exempt from tax under Section 10(35) of the Income Tax Act, 1961
  • For the Maturity Proceedings category, the long-term capital gain up to an amount of Rs. 1 lac is exempt from tax. This occurs under Section 112A of the Income Tax Act, 1961. The gain above Rs 1,00,000 is chargeable to tax at a standard rate of 10 percent.

Minimum Lock-in Period

Equity Linked Saving Schemes hold a standard lock-in period of three years from the date of allotment of units. Upon the expiration of the three-year lock-in period, these units can be redeemed or switched.

During this three-year lock-in period, investors cannot pledge, sell, transfer, redeem, or even alter their holding in the fund in any manner.

The Equity Linked Saving Scheme holds the lowest lock-in period compared to other investment options that fall under the 80C deduction.

Any such PPFs can have a lock-in period of 15 years, the NSC investments hold a limit of six years, and bank fixed deposits eligible for tax deduction are locked a minimum of five years.

Higher Rate of Return

About a minimum of 80 percent of the portfolio amount from the total fund is required to be invested into equities. This provides a higher return in comparison to the other instruments.

Generally, 14 to 16 percent of the superior returns are given compared to other tax-saving options in the long period of about five to seven years.

You cannot remain ignorant of the risks as all the ELSS schemes are equity-based and market-linked.

However, the AMC’s design of ELSS schemes are based on the large-cap, mid-cap, and small-cap and the risks and returns vary. Therefore, ELSS schemes provide you flexibility in taking the risk of investing in the service or a scheme.

Flexible and Disciple

Investment in Equity Linked Saving Scheme can be made using a lump sum amount, a full-time investment done in a single time. The investment by the Systematic Investment Plan or SIP is a small investment scheme spread over some time.

Equity Linked Saving Scheme holds no restriction on the maximum amount that can be invested. However, the only condition is that you need to invest to a minimum amount of Rs. 500.

The ELSS scheme offers the availability of monthly investments, where you can get to discipline your investment and tax planning.

Generally, it is recommended that the investors follow the SIP route as it spreads the investment over a longer duration. It even avoids the risk of downside market peaks.

High Level of Transparency

In the ELSS scheme, you can track the changes in your portfolio value regularly.

You get the freedom to access this information and help yourself in making more educated decisions regarding the overall return from your diversified portfolio.

In the ELSS scheme, you can maintain this level of transparency, which is not available in the case of any other tax saving investment option.

Dual tax benefit

As mentioned before, the amount invested into the ELSS scheme qualifies for deduction up to limits specified under Section 80C.

But, even the profit or the capital gain obtained from the Equity Linked Saving Scheme is tax-free.

However, if you see a return from National Savings Certificates or tax-saving bank FDs, you are taxable, and the amount gets added to the income.

Only PPF schemes offer a tax-free return but hold a  maturity period of 15 years.

Concerns Regarding ELSS

A few things which are required to keep in mind before investing in the Equity Linked Saving Scheme is-

  • Inherent Risk: The Equity Linked Saving Scheme invests funds in the equity stock market. So, all the risks associated or involved with equity investments get connected to the ELSS scheme.
  • Premature withdrawal not allowed: You cannot withdraw your funds before the standard lock-in period limit of three years. Other instruments like PPF and bank deposits permit premature withdrawal provided that you abide by the restricted conditions.
  • Selection of Scheme: Lots of Equity Linked Saving Schemes are available in the market. Therefore, before you invest, you should do a thorough background check of the ELSS fund. Ensure you check the performance before deciding to invest. This check is similar to the checks done before investing in other general mutual funds, like, compassion, asset under management, low investor ratio, and ample diversification.

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