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ELSS Meaning, Tax Benefits & How to Invest in ELSS Mutual Fund

ELSS Meaning, Tax Benefits & How to Invest in ELSS Mutual Fund

If you are looking to grow your wealth while enjoying tax deductions, you will be happy to know that the market offers just the product for it. Equity-Linked Saving Schemes (ELSS), a category of mutual fund (MF), helps you fulfil these two goals. Whether you are an early or a sophisticated investor, you can secure tax-efficient returns with an investment in an ELSS scheme.

Read on to understand how ELSS works and reduces your tax outgo while delivering a good return on your investment.

What are ELSS funds?

Equity-Linked Saving Scheme is a specialised MF scheme that invests in equity and equity-related financial instruments. In this scheme, at least 80% of the corpus is invested in equity-linked securities.

While there is no maximum investment tenure, a lock-in period of three years is standard. This means you cannot make a premature exit. The fund’s assets under management (AUM) are diversified across several market themes, capitalisations, and sectors.

Since this is an equity-oriented scheme, you can earn superior returns on your investment depending on the stock market’s performance. To maximise the benefits of this mutual fund, opt for a long-term investment. You can start by establishing your investment goals as the year begins and invest through lump sum or Systematic Investment Plans (SIP). Use Tata Capital Moneyfy’s SIP calculator and get an estimate of how much your investment will grow towards the end of the tenure.

Additional Read: Is ELSS a Wealth Creation & Tax-Saving Tool?

Features of Equity Linked Savings Scheme mutual funds

Here are some key features of ELSS mutual funds:

- Equity exposure: ELSS mutual funds primarily invest in equities, offering exposure to the stock market.

- Tax savings: ELSS investments qualify for tax deductions up to qualify for tax deductions up to Ts. 1.5 lakhs annually under Section 80C of the Income Tax Act.

- Lock-in period: ELSS has a mandatory three-year lock-in, making it suitable for long-term investment.

- Diversified portfolio: ELSS mutual funds invest across different sectors and market capitalisations, lowering risk.

- Market-linked returns: Returns of an ELSS mutual fund are influenced by market performance, potentially outperforming traditional fixed-income options in the long term.

How Does ELSS Funds Work?

- ELSS funds primarily invest in stocks of companies from various market capitalisations and sectors.

- The portfolios are diversified to spread risk across industries, reducing the impact of a single sector or company on the fund's performance.

- Fund managers select stocks based on detailed market analysis to achieve balanced risk-adjusted returns.

- You can claim deductions on your ELSS investments up to Rs. 1.5 lakhs under Section 80C every year.

How does ELSS act as a tax-saving tool?

ELSS is a popular tax-saving instrument. But before we dive into its tax benefits, let us answer the question - what is a tax-saver mutual fund?

For a taxpaying investor, a tax-efficient scheme produces tax liability and is eligible for tax deductions under Section 80C of the Income Tax Act. The Income Tax Act grants ELSS numerous tax benefits. Why? Since you lock in your funds for a minimum of three years in this scheme, the generated returns are treated as long-term capital gains (LTCG) from equity schemes.

Section 80C of the Act ensures that ELSS investments up to Rs. 1.5 lakh qualify for tax deductions for your taxable income in a financial year. The maximum marginal tax rate on returns is 30%, but only 10% is charged on ELSS funds.

What are ELSS funds known for?

Hedge against inflation

This tax-saving scheme has the shortest lock-in period. But, if you invest steadily across the year, you can decrease your exposure to market volatility and generate long-term wealth. ELSS funds are one of the only tax-efficient investment options promising inflation-beating returns.

Low minimum investment

You don’t need a huge amount to start reaping the benefits of this wonderful scheme. Start investing with an amount as small as Rs. 500! The minimum investable corpus varies from one fund house to another.

Diversification

While ELSS funds primarily comprise equities, they also include fixed-income securities. With an ELSS fund, you can easily diversify across small-cap to large-cap companies across sectors.

Additional Read: ELSS: Wealth Creation Analysis

How Should You Invest in an ELSS Mutual Fund?

You can invest in ELSS through:

- Online investment platforms like Tata Capital

- An agent

- An existing Demat account

- Registrars

FAQs on ELSS Fund

1. What is the ELSS mutual fund's meaning?

ELSS mutual funds are tax-saving investment instruments that invest primarily in equities. They offer potential long-term wealth creation, diversification, and tax benefits under Section 80C of the Income Tax Act.

2. Is ELSS risk-free?

No, ELSS funds are not risk-free. As equity-oriented investments, they are subject to market risks, including price fluctuations and economic changes.

3. Can I draw out my ELSS after three years?

Yes, ELSS investments have a mandatory three-year lock-in period. After this, you can withdraw your funds.

4. What is the exposure for ELSS funds?

ELSS funds have high equity exposure. They offer long-term wealth creation and tax savings benefits. However, it's important to consider your risk appetite before investing.