ELSS Mutual Fund: A way to claim tax deduction while enjoying market-linked returns

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ELSS Mutual Fund: A way to claim tax deduction while enjoying market-linked returns
Source: Unsplash
  • ELSS is an open-ended equity mutual fund that invests primarily in equities and equity-related products.
  • ELSS funds have a lock-in period of three years, meaning that investors are not allowed to withdraw their investment before the completion of this term.
  • Under Section 80C, investors can claim a deduction of up to ₹1.5 lakh by investing in ELSS funds.
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If an investor decides to opt for the old tax regime, he/she can still take advantage of the various deductions available to minimise tax outgo. Section 80C, with its plethora of tax-saving investment options, remains a favourite with investors.

One of the options to save tax under section 80C is ELSS (equity-linked saving scheme), which is a type of mutual fund that focuses mainly on equities and provides tax benefits to investors, making it a popular investment choice.

ELSS funds have a lock-in period of three years, meaning that investors are not allowed to withdraw their investment before the completion of the term. This lock-in period is shorter than that of other tax-saving investments such as the public provident fund (PPF), national savings certificate (NSC), and fixed deposits (FDs).

Under Section 80C of the Income Tax Act, investors can claim a deduction of up to ₹1.5 lakh from their taxable income by investing in ELSS funds. This deduction is one of several deductions available under Section 80C.

Despite being considered high-risk investments due to their primary focus on equities, ELSS funds have the potential to provide higher returns than other tax-saving investments over the long term. Professional fund managers manage ELSS funds and base their investment decisions on market trends and analysis. “Investment in ELSS is a good option as it gives both tax benefits, as well as good return. A taxpayer saves tax on the amount of investment made. Further the return on such equity investment is better than any investment in debt like FD, bonds etc,” says Ved Jain, founder, Ved Jain Associates, a chartered accountancy firm.

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Though past performance is not an indication of future returns, ELSS funds as a category have given 9.64% returns over the last 5 years, and 14.58% returns over the last 10 years.

Investors have two options for investing in ELSS funds: lump sum or systematic investment plan (SIP). In a lump sum investment, the entire investment amount is made at once, while in an SIP investment, a fixed amount is invested at regular intervals. SIP investments are an excellent choice for investors who want to invest in ELSS funds but do not have a large sum of money available at once.

“Investors should look at ELSS as an opportunity to participate in an equity scheme. It should be looked at as an option for creating wealth in a 15-year time frame. Tax saving should be taken as incidental benefit,” says AK Narayan, CEO and founder of AK Narayan Associates, a financial planning firm.

Investors can select from various ELSS funds offered by different mutual fund companies. Before investing, it is essential to conduct research and compare the different funds to ensure that they are aligned with one's investment goals and risk appetite.
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