Every person has both immediate and long-term financial objectives. It takes dedication and a well-thought-out investment plan to achieve them. Investors expect their investment options to support them in achieving their objectives and producing wealth over time.
Not only that but there is nothing comparable if the investment option would enable them to save on taxes.
This is where Equity-Linked Savings Schemes, or ELSS, can help. These tax-saving mutual funds have recently grown in popularity among investors.
How do ELSS Funds work?
An ELSS fund is a type of equity fund that enables stock investments. But this does not always imply that all your funds will be invested in the stock market.
A good way to profit from the stock market without taking on too much risk is to invest in an ELSS fund. Under section 80C of the Income Tax Act, ELSS offers a tax benefit of up to Rs 1.5 lakh per year with a lock-in of 3 years.
SIPs or lump-sum payments can be used to invest in ELSS. If payments are made by SIP, a 3-year lock-in period is applied to each SIP.
Investing Options for The Best ELSS Funds
When choosing the growth option, the fund’s earnings are not distributed as dividends. Instead, they are put back into the plan. At the moment of redemption, the profits are given to the investors. This also relies on the fund’s NAV because rising earnings will increase NAV and vice versa.
As the name implies, the earnings generated by the schemes are instead paid out to the investors as dividends every six months, three months, or a year. The declaration and payment of dividends are not set in stone. It only occurs when the scheme makes money.
Dividend Reinvestment Option
The third choice provided by ELSS Funds is to return the dividends while raising the NAV. Most investors favor this choice when the market is rising during the lock-in period.
Key features of ELSS Mutual Funds
These are key features of ELSS funds:
- A significant portion of ELSS funds’ portfolios is invested in equities.
- They have a 3-year mandatory lock-in term, the shortest of all the tax-saving tools.
- You profit from both tax savings and capital gains from equity investing investments.
- If you want a consistent income, you can choose dividend payouts; if you want capital appreciation, you can choose the growth option.
- Entry and exit loads are not present in ELSS mutual funds.
- Long-term returns from good ELSS funds are in the 10–12% range, among the greatest financial vehicles in the tax-saving category. However, as with equity investments, ELSS also carries some risk.
Tax advantages of ELSS fund investing
The minimum holding period for investments in the ELSS category is three years. Thus, profits from selling those units will be considered long-term capital gains, or LTCG. Over an overall cap of Rs. 1 lakh, long-term capital gains are subject to a 10% tax.
The ELSS falls in the middle of various financial products that help people save money on taxes. Fixed deposits that save on taxes are one extreme; the interest collected is taxed according to your income tax bracket. This implies that the tax you must pay on your gains could be as high as 30%. A PPF, on the other hand, gives a tax-free interest rate while having a 15-year lock-in period.
ELSS funds can significantly increase your wealth and lower your tax burden. Therefore, you can use this money to reach your long-term objectives, such as retirement and the education of your children, where you must significantly outpace inflation.