As instruments for investment go, any investor wishes to save as much tax as possible. Besides prospective good returns in the future, tax saving is a benefit that every individual looks for, as the amounts paid in tax can sometimes lower gains substantially. If you want a good way to invest, yet cut down on amounts you end up paying in tax, you can think of ELSS funds. 

Apart from tax saving instruments and gainful earnings, you may be looking for high liquidity with lock-in tenures that are short. Here too, ELSS funds offer a solution to your investment quandary. 

What are ELSS Mutual Funds?

ELSS mutual funds are funds that you can invest in with a major part of your wealth being invested in/allocated to equity-linked instruments. These funds are commonly known as schemes that save you tax since you can get a tax deduction amounting to Rs. 1.5 lakh from your yearly taxable earnings. As per Section 80C of the Indian Income Tax Act, this is possible if you invest in ELSS mutual funds. Before you get a hang of how to save tax on these schemes, you should know some features of the funds you are planning to invest in. 

Features of ELSS Mutual Funds

The name says it all and you can make out that ELSS funds invest the main portion of your wealth in equity-based assets. Recently, as more individuals try to combat inflation and wish to save on tax, these funds have become quite the favourites with investors. Here are some key features you should have knowledge about:

  • There is a mandatory lock-in period that is three years.
  • At least 80% of your wealth in an ELSS fund is invested in equity-linked instruments or direct equity.
  • No maximum investment tenure exists.
  • Through ELSS funds, investments are made in a diversified fashion. Investments are made across various market capitalisations, sectors and themes.
  • The tax exemption you can receive by investing in an ELSS fund is according to tax rules under Section 80C of the Indian Income Tax Act. 

Invest and Save Tax

ELSS mutual funds, and investments made in these schemes, fall within the tax laws under Section 80C of the Income Tax Act of India. Tax deductions are permitted on the principal amount invested. Here are the highlights of tax deductions with an ELSS fund: 

  • The tax exemption that investors can avail of with ELSS funds are cumulative in nature. 
  • The exemption of tax is up to Rs. 1.5 lakh.
  • ELSS mutual funds have a compulsory lock-in term of three years, before which you cannot redeem any funds. Consequently, after redeeming units in an ELSS fund, you are bound to receive LTCG or long-term capital gains. 
  • Long-term capital gains received by investors through ELSS funds are not taxable up to amounts of Rs. 1 lakh in any single financial year. 
  • Any long-term capital gains that are earned above the limit of Rs. 1 lakh, are liable for taxation at 10% of the earnings gained (without indexation). 

Tax Saving ELSS Mutual Funds – Why Invest?

The features and benefits of ELSS mutual funds translate into reasons to invest in these kinds of funds. Here they are, summarised: 

  • You get diversification as these funds are linked to small and large-cap companies, ranging in various key sectors. 
  • The minimum amounts to invest are low and anyone can take advantage of this and start investing small amounts and save tax simultaneously. 
  • In an ELSS scheme, a lump sum investment is permitted. Nonetheless, several investors favour the SIP investment channel. The reason for this is that via a SIP, you can invest your wealth in small amounts as you see fit. This lets you avail certain tax benefits. As a result of this, you save your money and grow your capital at the same time. It’s a win-win situation for you all around. 

Planning Taxation and Investment

ELSS funds are the only kinds of mutual funds that invest in equity markets and give you advantages in taxation. As such, investors tend to view ELSS fund investments mainly for planning their taxation. In case saving on tax is the key purpose of your investment, then you may want to check other options of investment, with tax deductions available within Section 80C of the Income Tax Act of India. 

Since most investors are looking to diversify portfolios by the distribution of their wealth in a range of investment products, you can explore ELSS funds and other financial investment instruments, all based upon your financial objectives. Whenever you make investments, planning for taxation is a right of passage and you should see that you benefit by specific tax deductions. However, you should be wary if your only purpose is to save tax, as many investors reach out to invest in an ELSS fund at the last hour, in a virtual rush to save on tax payments. At such a time, investors cannot invest gradually and are forced to choose lump sum amounts to invest.