ELSS for Saving Tax and Targeting Long Term Goals

By Tori 3 years ago

In the recent past, ELSS funds have received a great traction from Indian taxpayers. The reason, more and more individuals are becoming aware about the quality features and benefits of this tax saver fund. No other tax saving instrument holds the potential to offer investors with long term capital appreciation the way ELSS does. If you are new to tax planning and looking for a scheme that comes with a dual benefit of tax saving and long term corpus building, you can consider investing in ELSS.

What is ELSS?

Equity Linked Savings Scheme, abbreviated ELSS, is an open ended equity mutual fund scheme that comes with a tax benefit. ELSS is the only mutual fund scheme under Section 80C of the Indian Income Tax Act, 1961 that offers tax benefit. An individual can invest up to Rs. 1,50,000 per fiscal year in an ELSS fund and seek tax deduction for this invested amount.

Here’s an example to help investors understand how ELSS works –

Samir Saxena is a data scientist with a market research company who draws and annual salary of Rs. 12.5 lakhs. This lands him in the highest tax bracket. Samir learns about ELSS from a colleague and decides to invest Rs. 1.5 lakh in the tax saver fund. As per 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1,50,000 in ELSS and claim tax deductions for the same. By investing in ELSS Rizwan’s gross taxable income has now come down to Rs. 11.(12.5-1.5) lakhs per annum. Also, the three year lock in gives the amount invested an opportunity to earn interest and might even help Samir building wealth over the long term.

Can ELSS help you target long term financial goals?

Just like any other equity oriented scheme, ELSS too needs time to show its true potential. Hence, if you are investing in a tax saving scheme like ELSS, you can keep a long term investment horizon spanning anywhere between 10 to 15 years. The longer you remain invested the higher benefits you can reap from this equity mutual funds scheme. This tax saver fund comes with a predetermined lock-in period of three years. If you consider other tax saving instruments that fall under Section 80C, ELSS comes with the shortest lock-in period. Also, you are free to redeem the long term capital gains that you will earn at the end of your investment journey. However, to target your long term financial goals it is advisable to remain invested as long as the scheme is performing as per your expectations. Also, ELSS schemes are far flexible in nature so it becomes easy for investors to modify their investments depending on their income needs.

An ELSS fund investor can start a monthly SIP in this tax saver fund for disciplined and long term investing. A Systematic Investment Plan is an easy and convenient way for investing in mutual funds like ELSS. Investors need to be KYC complaint to invest in ELSS scheme via SIP. One does not need to have large capital as initial investment amount to start a SIP in ELSS fund. Some fund houses even offer investors to start SIP with an amount as low as Rs. 500 per month.

Investors are free to stop their SIP investments depending on the performance of the ELSS fund and switch to a better performing tax saving scheme. They can even refer to SIP calculator, a free online tool that helps you get a rough estimate on the capital gains which you will receive at the end of your investment journey.

Do understand that ELSS doesn’t guarantee capital appreciation, hence it is better to understand your risk appetite and invest accordingly.