Come December and a palpable frenzy can be witnessed everywhere in the office! It is the time companies ask employees to submit their investment proofs for tax calculation, and suddenly everyone starts discussing tax and tax-saving investments. It is usually at times like these that you may make uninformed investment decisions by parking your funds in instruments that either don’t end up beating inflation, or lock up your money for a long time.
This is when the concept of equity-linked savings scheme (ELSS) gains prominence. ELSS doesn’t only save tax for an investor, but it also helps fulfil investors’ goal of creating wealth in the long-term. One can invest in ELSS funds to meet their various life goals of buying a vehicle, a house, taking a long-awaiting international vacation, etc.
Here are five things you need to know about ELSS funds:
ELSS funds fall under the Section 80C category of investments, which help you reduce your taxable income by up to Rs. 1.5 lakh in a financial year. Investors falling in the tax bracket of 30% and 20% can end up saving up to Rs. 46,350 and Rs. 30,900, respectively.
Unlike other instruments, the returns earned on ELSS funds are exempt from tax deducted at source (TDS). This means no capital gains tax will be levied at the time of redemption and the dividend received is tax free.
The one feature that makes ELSS stand out among its other tax-saving peers is that of its lowest lock-in period of three years; tax-saving fixed deposits (FDs) have a lock-in period of five years whereas Public Provident Fund (PPF) has 15-year lock-in period.
As the name suggests, ELSS funds invest majority of its assets in the equity market, thereby helping investors earn inflation-beating returns over the long term. While investing, you will have two plan options –growth and dividend- to choose from. Experts recommend opting for the growth option as it will work well with your long-term goal of wealth creation via the compounding effect.
Opening an FD or PPF account needs a lump sum amount to be invested, but that’s not the case with ELSS funds. You can start an ELSS fund with an amount as small as Rs. 500. What’s more, you can set up a predetermined date for investing via the systematic investment plan (SIP) route. This will ensure you maintain a disciplined approach towards investments, while also helping you grow your wealth, in a tax-friendly way!