Is there any instrument which provides an opportunity of capital appreciation together with Tax saving? We will be discussing one such instrument called Equity Linked Saving Scheme (ELSS) in this article.
What is ELSS?
Equity linked savings schemes (ELSS) are equity-oriented mutual fund schemes with an added feature of tax saving under different sections of the Income Tax Act together with the regular features of a mutual fund. Investments up to 1 lakh in ELSS funds are eligible for deduction from taxable income.
What are the Key Features?
These are equity oriented mutual fund schemes where asset allocation towards equities can go in the range of 80 to 100%. As the allocation is tilted toward high return assets like equity, the main objective of such funds is capital appreciation.
What is the Tax Benefit attached to ELSS?
When you invest in ELSS you are eligible for tax benefits under various sections of income tax act. The most important benefit is, investment up to a maximum of 1 lakh is eligible as deduction from taxable income under section 80 C. Capital gains which you get from the investment on redemption are tax-free under section 10(38). While holding the scheme the income you receive in the form of dividend is tax free under section 10(35) of income tax act.
Although ELSS has a lock in period of three years, it’s advisable to invest in this scheme as the lock in period is still smaller than other tax saving schemes like PPF and NSC. ELSS also provides an opportunity of capital appreciation if market performs well. There is absolutely no scope of capital appreciation in case of PPF and NSC schemes above the agreed interest rate. Here, the lock in period of 3 years favors you as most of the allocation is towards equities.
Equities traditionally are considered as long term investment options and long term investors generally get above normal returns. The lock in period of three years keeps the temptation of selling your holding prematurely at bay. This restricting feature should be seen as blessing in disguise which is ultimately going to reward you in future. Together with this, your return percentage also gets a nice boost in the form of Tax savings. If you are not market risk averse and ready to take a little bit of risk investment, ELSS is recommended.
By investing in ELSS, you also save the time and effort of researching the stock market together with enjoying the above average returns.