ELSS funds are equity funds that allocate a significant amount of their assets to equities or equity-related products. ELSS funds are also known as tax saving schemes since they provide a tax exemption of up to Rs 150,000 from your annual taxable income under Section 80C of the Income Tax Act during the previous tax regime.
An ELSS fund is an equity-oriented strategy that requires a three-year lock-in period. In recent years, many taxpayers have turned to ELSS programs to take advantage of tax benefits.
If you invest in ELSS schemes, you can get a tax break on the amount invested up to Rs 150,000. Furthermore, the income earned under this scheme at the end of the three-year period will be considered Long Term Capital Gain (LTCG) and taxed at 10% (if the income exceeds Rs 1 lakh).
Now that tax season has begun, Section 80C remains a popular tax-saving strategy in the hands of taxpayers who prefer the old tax regime, and the ELSS is a popular option. Section 80C of the Income Tax Act requires all tax-saving instruments to be locked in for a set number of years. ELSS provides the shortest lock-in period of all of these choices, as well as the potential for better long-term gains.
"If you invest Rs 1.5 lakh in an ELSS fund in the financial year and fall under the highest tax bracket (Rs 10 lakh and above), you can save Rs 46,800 in taxes," stated Value Research in a research note.
The Section 80C tax deduction works by reducing your taxable income to the amount of your investment, up to a maximum of Rs 1.5 lakh.
Why ELSS?
"ELSS schemes are mutual funds that provide exposure to a variety of underlying markets, including large-cap, mid-cap, and flexicap." These plans are advised for tax-aware individuals with a debt-heavy asset portfolio. ELSS enables members to invest in the stock market while saving taxes. The three-year obligatory lock-in term bans withdrawals. During market downturns, the long-term potential of equities can assist to offset transitory swings. The lock-in has no substantial impact on the investing strategy, but the market's amount of exposure should be evaluated. "SIPs over 12 installments over 12 months are recommended for ELSS investments," stated Vijay Kuppa, CEO of InCred Money.
Should you invest via SIP or lump sum?
"Using a Systematic Investment Plan (SIP) helps investors to automate their contributions at regular intervals, increasing discipline and maximizing the benefits of rupee-cost averaging. Investing in ELSS can be done in a flat sum of Rs 1.5 lakh or in Rs 12,500 SIP installments over the course of a year. The SIP method can be especially useful in volatile equity markets because it spreads investments over time. A lump sum investment, on the other hand, offers immediate market exposure and the chance to profit from market rallies. Misbah Baxamusa, CEO of NJ Wealth, stated that the choice between SIPs and lump sums should be based on the investor's risk tolerance, financial goals, and market forecast.
What about the lockdown?
The lock-in period for ELSS funds lasts three years from the date you invest. To find out when it will terminate, simply add three years to the date you invested. If you invest through SIP, treat each installment as a distinct investment with its own lock-in period beginning on the date of SIP registration. As a result, each SIP installment is treated as a distinct lump sum investment for the purpose of the lock-in period.
The lock-in period offers you additional tax benefits on the return produced as a result of the lock-in. The issue of short-term capital gains is also resolved, and you will only pay long-term capital gains tax at 10% on gains exceeding Rs. 1 lakh at the time of redemption. Tax savings are only attainable if you use the previous tax regime. The new tax regime provides no tax benefits for any investment vehicles.
How do I choose the correct ELSS fund?
"Choosing the right ELSS fund is akin to selecting an equity-oriented mutual fund. Choose the fund based on your goals, risk tolerance, and willingness to hold the investments for at least three years. Periodically assess your ELSS investments and make changes as appropriate based on your risk tolerance and evolving financial goals. Avoid withdrawing your investment before the necessary three-year lock-in period. Remain involved even during market downturns, as equities' long-term potential can help offset short-term swings," advised Baxamusa.
Choosing the right fund is critical because the return difference between the top and lowest quartiles is significant. "To choose a fund, one might consider a variety of criteria such as consistency in exceeding the benchmark, risk ratios, fund manager track record, AUM size, etc. Allocate the maximum amount allowed in the category for tax savings. Invest for the long term, and don't rush to redeem the fund once the three-year lock-in period expires. After the lock-in time is finished, review the fund's performance and stay invested for at least 5-10 years, or even longer if all conditions are met. "Invest on a regular basis through SIP/STP and use any significant market downturn to add a lump sum," said Mukesh Kochar, AUM Capital's national head of wealth.
To maximize the benefits of a tax-saving ELSS fund, an investor should avoid the following two significant mistakes:
The first mistake is to view this investment solely as a tax-saving one. Tax efficiency should be a subset of your goal planning. "The ideal approach would be to identify your most important financial goals, and then, depending on tax requirements, direct some of your investments to a tax-saving fund." This would enable you to not only reach your long-term goals, but also achieve tax efficiency for the fiscal year," said Harsh Gahlaut, Co-founder & CEO of FinEdge.
The second mistake is waiting until the last quarter of the fiscal year to invest (typically when HR requests tax-saving proof). "To avoid this, plan, stagger, and automate your tax-saving investments at the start of the fiscal year. "Identifying the amount you can save under section 80 C at the start of the year, reviewing your financial plan, and then aligning a monthly SIP in an ELSS would give you multiple benefits of investing towards your goals, saving taxes, reducing risk by staggering your investments, and reducing the pressure on your finances of investing a lump sum at the end of the year," said Gahlaut.
