Did You Know You Can Reduce Your Tax Bills Using ELSS? Read To Know How

If you are looking to save taxes and build wealth through equities. ELSS might just be your thing. What is that, you ask? We are talking about equity-linked saving schemes (ELSS). Mutual Funds or ELSS, both are the same. A diversified equity fund that is connected to the stock market is known as an ELSS. It is a type of mutual fund that invests in equities and equity-related securities. Mutual funds are excellent tax-saving investments. If you invest your money in certain assets, you can deduct certain expenses from your taxable income.

ELSS comes with a lock-in period of three years. With a lock-in period, you have to leave your invested money in these funds for at least three years. The longer you keep your investment in these funds, the more likely it is that you will profit. ELSS class of mutual funds allows you to save tax. But how? Let's explore.

Save Tax

Under Section 80C of the Income Tax Act, 1961, you can save tax or reduce your tax bills on ELSS investments. When you put your money down in an ELSS, you are essentially investing in a professionally managed portfolio that parks at least 80% of its corpus in equity shares.

Section 80C allows you to deduct the tax amount up to Rs 1.5 lakh if you invested in an ELSS. If you claim for the deduction, the first Rs 1.5 lakh you invest in these mutual funds would not be included in your taxable income category.

Many would ask, "Do I save tax each time if I have invested in multiple ELSS?" The answer is no! Annually total of Rs 1.5 lakh is subject to tax deductions, under section 80C. It's up to you whether you want to invest that money in a single fund or multiple ELSS funds.

How To Invest In ELSS?

1. Monthly SIPs are the most effective approach to investing in ELSS funds. The minimal monthly contribution through a SIP might be as low as Rs 500.
2. Calculate how much you have left over from the Rs 1.5 lakh limit at the start of each year after deducting the mandatory deductions. Divide this sum by 12 to calculate your SIP amount.

The Benefits of ELSS

 a. The only tax-saving funds within the Rs 1.5 lakh limit that also provide equity-linked returns.
 
 b. Provides you with both financial appreciation and tax benefits.
 
 b. When compared to other tax-saving tools like PPF and NSC, ELSS has the lowest lock-in time of three years.
 
 d. Because they are connected to the stock market, ELSS funds can provide high long-term returns, especially if held after the lock-in period expires.
 
 c. Good investment funds for individuals who are willing to take moderate to high risks.
 
 c. During the investment term, dividends from ELSS funds are tax-free.
 
 g. Profits from the selling of ELSS fund units are tax-free since they are considered long-term capital gains.

Bottom Line

If you are looking at some equity investment in a tax-smart way. ELSS might just be your thing. Also, remember to read all the documents related to the fund carefully. Read all the terms and conditions as well before stepping into the investment decision.