An Equity Linked Savings Scheme is commonly known as an ELSS mutual fund, that helps investors to save their taxes.
Tax-Saving/ ELSS Fund
An ELSS fund will allow an investor a deduction from the total income of up to Rs. 1.5 lakhs under the Sec 80C of Income Tax Act 1961, India. To save a certain amount of money from giving tax to the government, generally, investors search for ELSS funds with good returns.
For example, if an investor, puts around Rs. 1 lakh in a few ELSS Funds, the same amount will be deducted from the total taxable income. Hence this will reduce his/her tax burden to some extend. However, beyond this purpose, anybody can invest in the ELSS Funds.
SIP and Lock-in period of ELSS Funds
An investor is allowed to invest through Systematic Investment Plans (SIP) in an ELSS fund, for an investment up to Rs. 1.5 lakhs, made in a financial year.
An ELSS Fund will specifically have a lock-in period of 3 years from the date of investment. However, the investor can redeem the investment or switch after the lock-in period is over, but it is also allowed to continue the plan under the same scheme.
Top rates ELSS Funds like BOI AXA Tax Advantage Fund, Canara Robeco Equity Tax Saver Fund, Mirae Asset Tax Saver Fund, Quant Tax Plan offer lucrative growths.
Renowned research firm, Value Research mentioned, "When you invest for 5 years or more, you can expect gains that comfortably beat the inflation rate as well as returns from fixed income options. But be prepared for ups and downs in your investment value along the way. Also, note that you cannot withdraw your money from this fund before completing 3 years from the date of investment. Like for all equity funds, you must invest only through the SIP route."
Additionally, to diversify the risk quotient, investors should invest in multiple ELSS Funds, in at least 3 ELSS Funds, that have offered good returns in the last last 3-5 years. If the funds offer profitable returns, one can continue with that particular scheme, otherwise, after 3 years, one can switch to other top-rated funds. To mitigate the risk, one must look out for the Expense ratio and asset allocations, and total assets of the selected funds, along with checking the previous years' average returns.
If one sells the fund units after 1 year from the date of investment, gains up to Rs. 1 lakh in a fiscal will be exempt from tax, while capital gains over Rs. 1 lakh will be taxed at 10%. If one sells the fund units within 1 year from the date of investment, the entire amount of capital gain will be taxed at 15%. However, an investor is not required to give tax till he/she is holding the fund units.
An ELSS fund will also offer an investor both growth and dividend options. Dividends will be added to the income of the investors, which will be taxed according to the investors' respective tax slabs. However, if the investor's dividend income crosses Rs. 5,000 in a fiscal, the fund house will also deduct a TDS of 10% before distributing the particular dividend.