June 18, 2024
New Delhi
Economy Finance

What Is An Equity-Linked Savings Scheme (ELSS)?

Equity-Linked Savings Scheme

Equity-Linked Savings Schemes (ELSS) fall under Section 80C of the Income Tax Act of 1961, which permits an individual or HUF to deduct up to Rs. 1.5 lacs from their gross income. According to the guidelines of Section 80C of the Income Tax Act of 1961, an ELSS fund or an equity-linked savings scheme is beneficial in two ways: it encourages saving and qualifies for tax deductions. By investing in ELSS mutual funds, you can receive a tax rebate of up to Rs. 1,50,000 annually.

Read: What is TREPS in Mutual Funds?

Read: What is the Employees Provident Fund

If an investor invested Rs. 50,000 in an ELSS, his tax liability would be reduced because the money was taken out of his overall taxable income.

From the date of unit allocation, these schemes have a three-year lock-in term. The units may be redeemed or swapped at any time following the end of the lock-in period. Growth and dividend possibilities are available with ELSS.

Tax deductions and long-term wealth creation are two advantages to investing in ELSS mutual funds. The shortest lock-in period of all tax-saving investments is three years, and ELSS mutual funds have the potential to deliver the highest returns of all 80C options.

Main Characteristics Of An Equity-Linked Savings Scheme

The primary characteristics of ELSS mutual funds are as follows:

  1. Under Section 80C, they provide tax deductions of up to Rs 1,50,000 annually.
  2. Three years is the lock-in period for ELSS funds, and there are no provisions for an early withdrawal.
  3. There is no maximum limit on investment amounts in ELSS, but some of the investment companies have fixed some minimum investment requirements.
  4. The only tax-saving investment that has a chance of providing returns that can outpace inflation is an ELSS fund.
  5. Tax deductions and wealth building are two advantages of investing in ELSS funds.
  6. In an ELSS, the funds are mainly invested in stocks, but they are also invested in some fixed-income assets.

Types

There are mainly two types of ELSS, which are based on the return payment and investment systems:

  1. A Growth Plan: After the lock-in period, participants in this plan get a lump-sum payment that includes both the money invested through SIPs and the earnings earned. Investors redeem the units to receive their entire value.
  2. The Dividend Plan: Even though there is a lock-in period during which you cannot choose to redeem the units to cancel the SIP, there is tax-free dividend income in this plan. However, you have the option of receiving the regular payout in the form of dividend payouts or choosing to have the dividends reinvested. As a result, the Dividend Plan is further separated into Dividend Pay-out and Dividend

Advantages Of Investing in Equity-Linked Savings Scheme (ELSS)

The advantages of SIP, such as the power of compounding, rupee cost averaging, and payment flexibility, are among the many advantages of ELSS. Other benefits of Equity-Linked Savings Scheme include:

  • It is a tax savings fund and the sole mutual fund, or SIP, that provides these advantages.
  • Due to its investment in companies across various industries, sectors, and capitalizations, it contributes to the portfolio’s diversification.
  • Due to its equity orientation, ELSS intends to provide investors with substantial returns following the completion of the three-year lock-in period.
  • It has historically produced returns at a rate of 12% on average, which is higher than the majority of other tax-saving investments.
  • Since ELSS is a type of SIP, investors can begin investing with a small amount and create a huge amount with a regular investment, as well as save taxes.
  • Systematic Investment Plan (SIP) investments in ELSS plans can be made for as little as Rs. 500 each month. Consequently, you can see your wealth increase with monthly minimum investments.
  • On ELSS funds, there is no exit load. Therefore, you can redeem your units whenever you like without paying a penalty.

How to Invest in ELSS

Your KYC and PAN card credentials must be present for the Equity-Linked Savings Scheme investing process to be completed successfully. A company that manages investments can be contacted afterward. There are numerous approaches to ELSS, including hiring a middleman or agent to handle all the investment-related tasks for you or handling them entirely on your own. You can even have a third party invest on your behalf as a final option.

Investing in ELSS is a very wise way to increase the value of your money. ELSS offers a highly attractive combination of growth, tax savings, and stability (subject to market risk). But in this case, it’s important to acquire the correct advice and direction. If you are provided with the proper guidance, you can identify the best-performing ELSS funds and avail yourself of a good return. There are various ways to invest in ELSS. You can go with any of them according to your convenience and knowledge.

1- Direct Investment from an Asset Management Firm

You must visit the mutual fund website to invest directly in ELSS. There are two investment possibilities available on the website. First, there is a simple way to invest without opening an account, and second, you can open a new account by selecting the “New User Option.” You should choose option two so that you can monitor and control the investment through the account. 

After creating the account, you must complete the FATCA form and provide your personal information. Then you’ll need to enter your bank information and upload a picture of the canceled check. You will be prompted by the website for your KYC information and Aadhar verification. After completing these formalities, you can choose the ELSS funds and transfer the amount to invest.

Utilize an online platform for investing in mutual funds.

This is the best way to invest in mutual funds since you can do it all from one account—invest, track, manage, get insightful reports, and obtain customer service. That, too, is free. The procedures for using an online investment platform are as follows:

  • Go to an investment platform and register for a user account.
  • Select an ELSS or a tax-saving strategy.
  • Define the payment amount and type (SIP or Lump sum).
  • Specify a few personal details, such as your PAN and bank information.
  • To finish the investment, make a money transfer online.

2- Use Your Current Demat Account to Invest in ELSS.

Only those who have a Demat account and brokers who are registered as mutual fund distributors may use this approach.

You must sign in to your Demat account to invest. Look for the mutual fund investment option. Among the given options, you can choose the one in which you want to invest. Then go ahead and invest by transferring money online.

3- Use Registrars Such as Karvy and CAMS to Invest in ELSS.

Utilizing mutual fund registrars like Karvy and CAMS is the last way to invest in ELSS. Investments can be made using either online or offline techniques.

Online technique: To use the online technique, go to the CAMS or Karvy websites.

Offline Method: If you want to invest in ELSS offline, you can do so by going to your regional registrar’s office and submitting a completed application. The canceled check and a copy of the KYC documentation must be sent with the application.

4- Utilise Your Agent to Invest in ELSS.

This is the most traditional way to invest in ELSS. If at all possible, stay away from utilizing it. Be careful not to be influenced by the agent’s advice or sales pitch. You should follow these instructions:

  • Contact your agent or a mutual fund distributor in your area.
  • Give him the completed application form.
  • Give him a copy of every KYC document.
  • Deliver canceled bank checks.

Conclusion

This is the only mutual fund that provides tax advantages, i.e., ELSS (Equity Linked Savings Scheme). It is also the only tax-saving SIP that falls under Section 80C of the Income Tax Act because the investment method is regular installments rather than a lump sum. Although it has a 3-year lock-in period, being equity-oriented means that it has the potential to offer investors higher profits. 

According to financial advisors, investing for a longer period of time will result in larger returns with lower risks. Therefore, ELSS is a good option for investors looking for capital growth with tax advantages. Although it can provide higher returns than FDs, PPFs, and other investments, ELSS requires investors to have a higher risk tolerance.

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