ELSS: Here's all you need to know

Is investment in equity mutual funds (MF) tax deductible? Equity Linked Saving Schemes is the answer. You get a rebate of up to Rs 1.5 lakh under Section 80C of Income Tax on this investment.

How does ELSS give ‘double’ advantage?

ELSS is a tax saving equity mutual fund. 80% of these funds are invested in equities. Just like you get returns in mutual funds, you get returns on ELSS investment as well. However, you do not get any tax exemption on mutual fund investment. And here ELSS is different from ordinary mutual funds. You can claim tax rebate on the amount of money you invest in this fund. Whether you do SIP (small installments) or pay a lump sum, you can take advantage of 80C deduction by reducing the amount of investment from your income.

Lock-in period

The tax-saving ELSS fund has a lock-in of 3 years. But, understand this lock in properly before investing. According to Dhananjay Banthia of Smart Acumen Consulting, if you invest lumpsum in one go, you can withdraw after three years, but if you invest in the installment through SIP, then every SIP will be matured in a cycle of three years. After three years, a SIP maturity will be happening every month. If Rajesh started in ELSS in January 2018 and invests Rs 5000 every month, then the SIP of January 2018 will be able to be redeemed in January 2021. At the same time, the SIP of February 2018 will be matured in February 2021.

According to Dhananjay, he advises investors to invest in ELSS only if you do not need those money for 5-7 years. To redeem it, your strategy should be that when the fund completes 4 years, withdraw the first year’s payment. Then in the 5th year, you can withdraw money for the second year. With this, you will also be able to save capital gains tax. Because, if the gain is more than 1 lakh, then long term capital gains tax of 10% will also have to be paid.

Tax exemption

You have to show every year’s statement of payment that you are doing in ELSS.

ELSS of PPF?

This question arises because PPF is completely tax-free and gains of more than one lakh rupees in ELSS attract LTCG tax. But the advantage of ELSS is that in this you will get better returns than PPF. PPF is getting 7.1% interest in this quarter and ELSS gives you 10-12% depending on the market. In case of lock-in, PPF has a long lock-in of 15 years.