- 1 view
Income Tax laws in India provide several tax benefits and incentives to the taxpayers. Tax deduction under Section 80C of the Income Tax Act, 1961 is one of the most commonly used tax benefits. The section provides a deduction of up to Rs. 1.50 lakh to the taxpayers from their taxable income for making certain eligible payments and investment options. Such options include contributions to Employee Provident Fund (EPF), contribution to Public Provident Fund (PPF), payment of Life Insurance Premium, repayment of home loan, investing in 5-year fixed deposits etc. ELSS (Equity Linked Savings Scheme), which also feature amongst such eligible investment options, are specified mutual fund schemes that invest minimum 80% of their net assets in equities and equity-related investments and carry a lock-in period of 3 years for the investors.
Advantages of investing in ELSS
ELSS features among one of the preferred investment options under Section 80C due to the following advantages:
- Tax Deduction: The mainstay of such mutual fund schemes is providing tax deduction to the investors. An investor can avail tax deduction for the actual amount invested by the investor, subject to the ceiling limit of Rs. 1.50 lakh under Section 80C. Such ceiling is applicable for all eligible payments/ investments under the section taken together.
One can invest in ELSS in lump sum mode or through a Systematic Investment Plan (SIP). Investing in ELSS through SIP enables the investors to spread the tax-saving investments across the year, which takes off the investment pressure for tax-saving investments during the last few months. Further, the investors must note that taking tax benefit is not a prerequisite for investing in ELSS funds, and one can invest in ELSS funds even when tax benefit is not required. - Lock-in period: ELSS are subject to a lock-in period of three years. This makes ELSS one of the attractive investment options under Section 80C, as it is the lowest lock-in period amongst eligible options. However, the investors need to note that in SIP investing, the lock-in period of three years is calculated separately for each investment and not from SIP registration itself.
Further, the lock-in period is inherent to the ELSS category of mutual funds, irrespective of whether the investor has availed tax benefits for such investments or not. Such a lock-in period helps the investors resist the temptation to redeem their investments during a market downturn which is counterproductive. - Tax-efficient Returns: As per the tax laws, the capital gains from mutual fund investments are taxed at the time of redemption from such investments. As such, the taxpayer must pay tax only once the profits have been realized. This makes investing in mutual funds attractive compared to traditional investment avenues, wherein the interest income may be taxed on an accrual basis.
Since the funds are subject to a 3-year lock-in period, the gains from ELSS funds are classified as Long-Term Capital Gains (LTCG). LTCG on equity funds is taxed at 10% (plus applicable cess and surcharge) without the benefit of indexation. The gain is calculated by deducting the redemption value from the cost of units redeemed. Additionally, there is zero tax on LTCG of Rs. 1 lakh every year on equity shares and equity funds, including ELSS, taken together. - Market-linked returns: Most eligible investment options under Section 80C provide fixed and guaranteed returns. However, investors can enjoy market-linked returns from their ELSS investments. Such funds are mandated under SEBI Guidelines to invest at least 80% of their net assets in equity securities. The investors get equipped with the potential of better returns through their ELSS investments. This augurs well for the investors who consider including ELSS investments in their financial plans and investing in ELSS funds with their long-term goals in mind.
- Flexibility to continue with investment on completion of lock-in period: Unlike most of the eligible investment options under Section 80C, which are liquidated automatically at the end of the specified tenor, the investors in ELSS funds enjoy the flexibility to continue with their ELSS investments even after the lock-in period. As such, the mutual investments are not redeemed automatically after three years, and the investors must make a specific redemption request to liquidate their investments in ELSS funds. As such, investors can also consider investing in ELSS funds for financial goals longer than three years. Holding investment for a more extended period may aid investors in wealth creation and achieving financial goals.
How to invest in ELSS funds?
One can invest in ELSS funds by submitting the duly filled application form at any of the Official Points of Acceptance of the mutual fund. Once the application has been validated, the acknowledgment slip for the form submission will be time stamped and processed as per the cut-off time. Further, one can also invest in ELSS funds online by visiting fund’s website. Once the investor’s KYC status has been validated on the portal through PAN, one must enter necessary details, including the scheme name mode of investment, i.e., lumpsum or SIP, etc. After the details, the investor must pay towards lumpsum investment or the first SIP instalment. Once the payment is done, the acknowledgement is generated on the screen and shared through the registered e-mail address. The mutual fund house shares the account statement within 1-2 working days after processing the transaction. Such an account statement is valid proof for the investors to claim deduction under Section 80C in the Income Tax Return.
In case one has opted for SIP investing, the SIP mandate must be registered on the Netbanking portal of the concerned bank account by mentioning the SIP reference number along with the autopay instructions. Once such mandate has been registered, the payment towards regular SIP instalments would be automatically deducted from the bank account and invested in ELSS funds.
Note: The tax provisions mentioned in the article are for illustrative purposes only and updated as per the Union Budget presented in the Parliament in February 2022. The deductions and lock-in period will be as per the provisions applicable on the date of investment, while the tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale.
