Equity-linked savings schemes (ELSS), also referred to as tax-saving schemes, are equity funds that invest a significant portion of their corpus into equity or equity-related instruments. As a mutual fund scheme category, ELSS offers exposure to various underlying markets, such as large-cap, mid-cap, or flexi-cap.
Typically, an ELSS fund is an equity-oriented scheme with a mandatory lock-in tenure of three years. ELSS has gained favour among taxpayers in the past few years. Such funds provide tax exemption of up to Rs 1,50,000 from your annual taxable income under Section 80C of the Income-Tax Act (ITA), 1961, as per the old tax regime.
Moreover, the income that an investor earns under this scheme at the end of the three-year tenure will be considered as Long-Term Capital Gain (LTCG) and will be taxed at 10% in case the income is above Rs 1 lakh. Also, ELSS has the shortest lock-in period with the potential for higher returns in the long term.
In case an investor who falls under the highest tax bracket, that is, Rs 10 lakh and above, invests Rs 1.5 lakh in an ELSS fund in a financial year, they can save up to Rs 46,800 in taxes, point out experts.
Experts recommend ELSS for tax-conscious individuals with a debt-heavy asset allocation. For investing in ELSS, an investor has the option to either opt for a 1.5 lakh lump sum or distribute Rs 1.5 lakh over the year in systematic investment plan (SIP) instalments of Rs 12,500.
The SIP strategy is favoured during the volatile equity markets, as it spreads investments over time. Similarly, a lump sum investment offers the advantage of immediate exposure to the equity market, potentially benefiting from market rallies. However, between SIP and lump sum options of payment, an investor should ensure that it aligns with the risk appetite, financial goals, and market outlook.
It is essential to not withdraw the investment before the mandatory lock-in tenure of three years. An investor should not be perturbed during market downturns, considering the long-term potential of equities could aid in overcoming temporary market fluctuations.
While choosing an ELSS scheme, an investor should ideally look at various factors, including consistency in outperforming benchmarks, risk ratios, a fund manager’s track record, and assets under management (AUM) size., etc.
In addition, review the fund performance after the lock-in period is over and stay invested for at least 5-10 years or even more in case all parameters highlight decent performance.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
