ELSS or ELSS mutual funds are open-ended diversified equity mutual funds with 3 years lock-in period. If you also need to save taxes while investing your money, then an ELSS mutual fund may be a perfect option. We will explain in this article how this would work, and to apply to mutual funds, you can click on this website.
ELSS tax saving mutual funds are among the best investment options for saving taxes under Section 80C of the Income Tax Act 1961.
- Investments in ELSS are exempt from taxes under Section 80C of the Income Tax Act 1961. By investing Rs 150,000 (the maximum amount you can invest as per Section 80C), you can save around Rs 46,350 in taxes (those in the highest tax bracket).
- The profits you make when you redeem units of ELSS mutual funds are tax-free upto Rs 1 Lakh in a financial year; post that, it is taxed at 10% only. Since investors remain invested for at least 3 years, there is no incidence of short-term capital gains tax.
- Investing in tax saving mutual funds helps you save taxes and allows you to build wealth over a while, as ELSS mutual fund schemes invest in equities.
Why should you invest in ELSS mutual funds?
There are many reasons to invest in tax saving mutual funds for new and existing investors. Here are a few of the primary ones:
1. Potential to create wealth
ELSS mutual funds are a great way to generate wealth in the long run. These funds offer tax-saving benefits apart from the potential for capital appreciation. ELSS funds come with a 3-year lock-in period and can generate up to 15% returns. Invest in a low-cost investment option. Investors can enjoy maximum return on their investment with minimal effort. This makes them highly attractive compared to traditional investments such as bonds or fixed deposits.
2. Higher returns
ELSS mutual funds offer investors the potential for higher returns than investments made with traditional instruments such as bank deposits, fixed deposits, and bonds. ELSS mutual funds also provide an avenue for capital appreciation and dividend income from the stocks held by the fund.
3. Better post-tax returns
Investing in ELSS Mutual Funds can offer a variety of advantages for the investor, including better post-tax returns. This is because ELSS funds are eligible for tax exemptions up to Rs 1.5 lakhs annually under Section 80C of the Income Tax Act. Additionally, dividend income and long-term capital gains earned on investments made in Equity Linked Savings Schemes are not taxable as they are exempt under Section 10(33) of the Income Tax Act. Therefore, investors can enjoy higher returns than those generated by other investment instruments such as Fixed Deposits or Public Provident Funds (PPF).
This makes it one of the best investment options available, especially if you want to maximize your post-tax return.
4. Shortest lock-in
ELSS mutual funds have the shortest lock-in period of three years among all tax-saving investments. This means that investors can withdraw their investments within three years, and this flexibility is desirable to those who may not wish to commit to a long-term investment plan. Furthermore, capital gains made on ELSS mutual fund investments do not attract taxation if the investment is held for at least 3 years, meaning that investors can make greater returns than other tax-saving options.
As such, investing in ELSS mutual funds is an excellent way to save taxes while earning rewarding returns over the medium term. Therefore, consider investing in ELSS mutual funds as part of your financial planning.
Why start tax planning early in the year?
Tax planning is one of the most critical aspects of financial planning, and here are the reasons why an investor must start it early in the year:
- Avoid tax outgo at financial year end – For employees, companies generally deduct tax in the last quarter of a financial year after accounting for all deductions. If you can’t avail of the deductions, there will be a significant tax outgo in the last quarter, which may leave you with less money for regular expenses.
- Make a simple investment decision – To keep your tax saving investments in autopilot mode, you can start SIP in ELSS mutual funds. Therefore, there will be no pressure to invest in tax savings as you will be investing every month. The other benefit of making monthly investments is acquiring ELSS scheme units at different price points, known as NAV, in mutual fund
- Have more control over your finances– Tax planning allows you to make informed decisions throughout the year, allowing you to manage your finances better and reduce wasted money on taxes. It also allows you to identify potential tax-saving strategies that can be implemented throughout the year, helping maximize your return.
- Make sound investment decisions– By starting early in the year; you can review all of your investments for the upcoming tax season and assess any changes or adjustments needed before filing taxes. This will give you time to make important financial decisions that can optimize your investments for the long term and minimize any unexpected surprises when it comes time to file taxes.
The Bottom Line
ELSS mutual funds are a good investment option with two-in-one benefits – tax saving and wealth creation. Investors should invest in mutual funds fully understanding the risk-return trade-off as they invest in equities. Starting early in the year helps to benefit from rupee cost averaging, compounding, and tax planning.
