What if someone told you that you could create long-term wealth while enjoying tax benefits? Traditional saving instruments with a big lock-in period Read this article may come to mind. But there are other tax-saving instruments with a shorter investment horizon that may also give you relatively reasonable returns.
An equity-linked savings scheme (ELSS) is a type of mutual fund product that doubles up as a tax-saving instrument.
What is ELSS (Equity Linked Savings Scheme)?
Simply put, ELSS is an equity oriented mutual fund eligible for tax deductions under the Income Tax Act, 1961. ELSS mutual funds are open-ended equity oriented schemes that invest primarily in domestic company shares and generate growth via capital appreciation for investors. The returns from ELSS funds are linked to stock market performance. To benefit from the tax subsidies, you have to invest in ELSS funds for a minimum of three years.
ELSS funds can be categorized into:
Growth option: ELSS growth option can help with wealth creation. The investor receives the full redemption amount as a lump sum at maturity.
Dividend option: ELSS dividend option give investors dividend income through the course of the scheme. As an investor, you can choose to receive payouts whenever the fund declares dividends, or you could choose to reinvest them.
Tax benefits of investing in ELSS
ELSS mutual funds allow you to save tax under Section 80C of the Income Tax Act, 1961. Investments of up to ₹1,50,000 are eligible for annual tax deductions. Although you can invest more, any excess amount will not qualify for deductions.
The returns generated from ELSS funds incur long-term capital gains tax at 10 per cent if total long term capital gains amount from equity oriented mutual funds/ equity shares are higher than ₹1,00,000 in a year. If you opt for a dividend option, dividends shall be taxable in the hands of the investors and the mutual fund will deduct TDS @10% for resident investor and @20%(plus applicable surcharge and cess) for non-resident investor before payouts. However, the Investor can claim tax credit of TDS deducted at the time of filing of their annual returns.
Despite this, ELSS funds can be considered one of the best tax-saving investment option because of their high return probability, as well as the relatively lower lock-in period, compared to other alternatives.
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