The main objectives of investing in mutual funds are to benefit from stock market movements and to earn good returns. However, profit or income earned from investing in mutual funds is also taxable under the Income Tax Act. An Equity-linked savings scheme (ELSS) is a special type of fund designed for investors to invest in mutual funds while enjoying the benefit of tax under section 80C of the Income Tax Act.
If you want to invest in mutual funds and looking to avail the benefits while investing in such equity-linked schemes, you need to understand ELSS. To take advantage of tax benefits under ELSS you need to understand its various aspects like how to identify which mutual fund falls under ELSS and how to choose or buy the right ELSS mutual funds to get the best returns with tax benefits.
What are ELSS Funds?
ELSS equity-linked savings schemes are just like other mutual fund schemes but provide tax benefits for the investors. Mutual fund houses and asset management companies offer ELSS Funds with other funds like equity mutual funds, debt funds and hybrid funds for different types of investors.
However, investors looking to take advantage of stock price movement with tax benefits should choose ELSS funds. These funds work differently and have different rules and regulations like restrictions of amount and lock-in period to avail the tax benefits. Hence, identifying such ELSS funds and choosing the right one is very important to make your investment worthwhile.
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How Does ELSS Mutual Fund Work?
ELSS is just like other mutual fund schemes, most of the funds on such schemes are invested in equities and equity-related investable instruments. The stocks in this fund are chosen on the basis of various criteria like market capitalization, sector and industries to create an ELSS fund. Professional fund managers manage this process after doing the research on stock market.
After creating the fund, the mutual fund companies offer this ELSS fund to investors to invest in such schemes. It is an open-ended fund scheme in which you can enter anytime or by the ELSS as per your feasibility. However, exiting from the ELSS fund is not possible before 36 months, as there is a 3-year lock-in period to liquidate your investment. Meanwhile, you can claim the section 80C on the Income Tax Act.
How to Identify ELSS Mutual Funds?
Mutual fund houses and assets management companies offer ELSS mutual fund schemes with designated tax benefits to inform and attract investors. You can easily identify the ELSS funds by checking the fund’s details. Most of the funds in this fund are invested in equities with some nominal portion in the debt funds. Out of total fund corpus, minimum of 80% is compulsory to invest in equity-related securities.
You can invest in ELSS either lump sum amount or through SIP but in both types of investment there is 3-year lock-in period to remain in the fund. One of the most important features of this fund is you can claim tax exemption under Section 80C of the Income Tax Act for investing in such schemes but up to a certain limit. The income or profit earned from ELSS investment is considered as a LTCG.
How ELSS Funds are Taxed?
ELSS mutual funds taxation rule is different from other mutual fund schemes. As you know the lock-in period for investing in ELSS funds is 3 years, hence you can’t liquidate your investment before that and are not eligible for any short-term capital gain. However, after 3 years when you sell your funds and earn profit then it is considered long-term capital gains which are taxable at the rate of 12.5% under the income tax rule.
Here you can get an exemption of Rs 1 lakh per year under this scheme but if you have invested in various other shames like ELSS, NSC, PPF etc, then the combined deduction is up to Rs 1.5 lakh is applicable under Section 80C of the Income Tax Act rules.
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ELSS Mutual Funds Lock-in Period
The lock-in period of ELSS mutual funds is 3 years, before that you can not liquidate your investment. However, it is an open-ended fund and you can enter or invest in such funds any time when offered by the mutual fund companies. But to avail of the tax benefits you need to stay in this scheme minimum of three years, and after that, it’s on you to keep your investment or liquidate.
ELSS Mutual Funds Tax Benefits
As per the income tax rules, if you invest in the ELSS Mutual Fund schemes you can avail the tax benefit of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. However, after the deductions your income will be taxed under the long-term capital gain tax with a 12.5% tax rate.
How to Choose ELSS Mutual Funds?
Choosing the right ELSS mutual funds is one of the most challenging tasks while investing in such schemes. There are many mutual fund houses and assets management companies offering ELSS mutual funds, but which one is better or suitable for you can be decided on a certain basis.
The first thing to check is the performance of the fund, which means how much return the ELSS funds have given over the past years. You can compare the ELSS fund’s performance with the main index and other ELSS funds offered by different mutual fund companies. Also, check the fund corpus allocation and fund manager profile with entry and exit loads to choose the best one as per your investment goals and risk profile.
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How to Buy ELSS Mutual Funds Online?
To buy the right ELSS mutual funds scheme online you simply need to choose the right broker where you can open your demat account and hold your investments. However, you can also invest directly through the mutual fund company’s website, but having an account with a stock broking company will provide you with the advantage of investing in various other financial securities through a single platform.
If you already have a demat and trading account you can choose the ELSS mutual funds as per your investment plan. You can either invest a lump sum amount or choose an SIP to invest at regular intervals but both can redeem your investments only after the end of the lock-in period. Till then you can enjoy the tax benefits and dividends income with growth in the value of your investment.
Summing-up
ELSS mutual funds are suitable for investors looking to invest in the stock market while saving some of the taxes on the profit earned from such investments. The deduction of Rs 1.5 lakh under section 80C in the Income Tax Act with the long-term capital gain tax is applicable when you liquidate your investment after the lock-in period of three years. You just need to choose the right mutual fund company offering the best tax-saving mutual funds with minimum brokerage or entry and exit load charges.
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