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Equity Linked Savings Schemes (ELSS) are a special category of equity mutual fund schemes that provide tax benefits to the investors and are commonly known as tax-saving mutual funds. As of 30 June 2021, such funds manage around Rs. 1.36 lakh crores of AUM (Assets Under Management). ELSS funds are reasonably popular amongst retail investors, with 1.28 crore investor folios in such schemes as on that date
Source: AMFI – Association of Mutual Funds in India
Tax Benefit
Investment in ELSS funds enables the investors to avail tax deduction under Section 80 C. Investment limit as per old tax regime is up to Rs. 1.50 lakhs in a year
There are other tax savings investment and payment options as well under Section 80C of the Income Tax Act, 1961, These include Public Provident Fund (PPF), contribution to Employee Provident Fund (EPF), 5-year fixed deposit, life insurance premium, home loan repayment, child tuition fee, National Savings Certificate (NSC) etc. The limit of Rs. 1.50 lakh per year is available for all the eligible investments clubbed together. So, if an investor falls in the highest income tax bracket of 30% and opts to be taxed as per old tax regime, they can save Rs 46,800, including 4% cess in income tax under this section per annum
Lock-in period is lower as compared to other tax saving options
ELSS funds have a lock-in period of 3 years which is lower as compared to the lock-in period for some of the other tax-saving investment products viz. PPF has 15 years lock in, Tax Saving Fixed Deposits and NSC have 5 years of lock-in. If an investor has made investments in ELSS funds through the Systematic Investment Plan (SIP), the lock-in period of 3 years shall be the date of investment of each SIP instalment and not from the date of SIP registration. During such a lock-in period, the investors cannot liquidate or pledge the units invested under such schemes.
Tax Incidence
Long term capital gains arising from selling equity shares and equity-oriented mutual funds are exempt from tax up to Rs 1 lakh in a financial year. The gains in excess of Rs 1 lakh are taxed at flat 10% plus applicable cess
Continuity of Investments after lock-in period expiry
Some investment options under Section 80C may be automatically liquidated/ redeemed once the lock-in period has ended. This may or may not require any further action from the investor. In case of ELSS, investors need to make a specific redemption request for redeeming from the fund. However, the investors may continue to stay invested in ELSS even post the lock-in period to achieve their financial goals.
Potential of Market-linked Returns
ELSS not just provides tax benefits for investors but also facilitates an investor to earn market linked returns as at least 80% of its net assets are in equity-related investments While it is not possible to project the future returns for ELSS funds, historical returns may provide a barometer to gauge fund's past performance.
Note: The tax rates mentioned in the article are for illustrative purposes only and updated as per the Finance Act 2021. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.
Disclaimers:
UTI AMC Ltd is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (acting through UTI Trustee Company Pvt. Ltd) accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully
This material is part of Investor Education and awareness initiative of UTI Mutual Fund.
The information herein should not be considered as 'investment advice'. Reader is requested to make informed investment decisions and consult their Mutual fund distributor or financial advisors to determine the financial implications with respect to investing in Mutual Funds
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