How much tax you can save by investing in ELSS Funds?

When it comes to money saving hacks, we look for a variety of options in our daily life. Some of these common traits are that we look for discount offers when we shop online. We even look for discount when we order food online. Even, when we book movie or flight tickets, we look for concessions and discounts. Apart from these, a common concern that plagues many individuals is how one can minimise tax liability. Thankfully, ELSS funds provide an effective and efficient way to reduce the tax bite on your hard-earned income. Over the course of a decade, the Indian Mutual Fund Industry has witnessed a remarkable expansion. The Net Assets Under Management (AUM) have soared from Rs. 7.46 lakh crore as of September 30, 2013, to an impressive Rs 46.58 lakh crore by September 30, 2023. Within this substantial growth, the Equity Linked Saving Scheme (ELSS) category alone accounts for approximately Rs. 17.98 crore of total assets.

What are ELSS funds?

Equity Linked Savings Scheme are also known as tax saver mutual funds. These are tax friendly investment options that allow tax deductions of up to Rs. 1.5 lakh per year under section 80C of the Income Tax Act, 1961. The best part about saving through this mutual fund scheme is that, it not only allows one to save taxes but also helps one in wealth creation via equity investment. Investment in this scheme can be done either via lump sum or through a Systematic Investment Plan (SIP). ELSS is the only scheme amongst all 80C investment options that comes with a lock-in period of 3 years. Thus, it is advisable to invest in these schemes through the SIP route. So, one can achieve long term wealth creation goals as well as with income tax saving plans.

What are advantages of Investing in Tax Saving Mutual Funds (ELSS)

1. Lower Taxation: ELSS Funds come with a mandatory lock-in period of three years. Investors are not allowed to liquidate investments before the three-year investment tenure gets fulfilled. After the lock-in period expired, any profits earned are subject to Long-Term Capital Gain (LTCG) tax rate of 10 percent. Nevertheless, it’s worth noting that gains of up to Rs. 1 lakh remain tax-exempt in a given financial year.

2. Comparatively lower lock-in period: Under section 80C, ELSS carries a lock-in period of only 3 years. Whereas, other tax saving schemes such as Public Provident Fund (PPF) and National Savings Certificates (NSC) come with lock-in periods of 15 years and 5 to 10 years, respectively.

3. Capital Appreciation Potential: By investing in the ELSS funds, one can reap the benefits of both tax saving as well as higher returns. Additionally, you can also opt for dividend pay-outs or you can choose growth options for capital appreciation. One can invest in these funds either through lump sum or through SIP. It is advisable to invest through the SIP mode so returns are compounded with time. These funds can generate equity linked returns. Historically, these funds have given returns exceeding 12 percent in the long term, making those comparatively highest-performing category of tax-saving instruments. However, one must remember that past returns do not guarantee that returns will be the same in future. Plus, these are equity funds and thus carry risk.

Tax Saving SIP

Equity funds are generally volatile in nature. Therefore, it is advisable to invest via tax saving SIP so that it can mitigate volatility factor of investment. SIP with tax saving perspective allows you to invest fixed, small amounts in the ELSS at regular intervals as per your preference. So that, you can divide the overall investment of Rs. 1.5 lakh over the entire year or any other tenure. Investing through SIP inculcates a habit of disciplined investing. You will not be left with the worry of regularly depositing the funds to your account. Additionally, investors acquire units of the mutual fund at varying prices, which effectively spreads and averages the cost of their investment over time.

How can you withdraw from ELSS?

Each SIP payment is treated as a distinct investment. Thereby each instalment is subjected to its own 3-year lock-in period. Consequently, the lock-in period would initiate from the day when units are allocated to you for each SIP made. However, aside from this distinction, all other aspects of redemption would align with the standard mutual fund practices.

Conclusion

One can save taxes through various investments, such as EPFs, PPFs, National Pension Systems (NPSs), Mutual Funds, etc. However, investing through tax saving SIP in ELSS funds comes with various benefits for the investor. The latest data from the Association of Mutual Funds in India (AMFI) shows that the folio count in the ELSS category reached 15.4 crore (as of September 30, 2023). This is highest compared to other equity-oriented schemes. These figures give confidence that tax savers are increasingly opting for this scheme. It is advisable that you start an SIP early so that you are able to reap long term benefits of compounding. You should stay invested for a longer horizon to benefit from potential market upsides. Not to forget, you must choose an ELSS fund as per your risk appetite and financial goals. Additionally, you must take expert guidance as well.