By now you may have already received a couple of emails from your respective HRs demanding you to submit income tax proofs for the on-going fiscal year. If you are a fist time tax payer, then you may not have planned your investments earlier and may even make a hurried decision. Tax investments must be pre-planned and when financial planning, investors must take tax planning into consideration and keep it a top priority. If you are yet to invest in a tax saving scheme or wish to consider a tax saving instrument that allows you to earn long term capital appreciation as well, then you may consider diversifying your portfolio with Equity Linked Savings Scheme (ELSS).
Today we are going to discuss ELSS, its benefits and the lock-in period so that investors can make an informed investment decision.
What is Equity Linked Savings Scheme?
An Equity Linked Savings Scheme or ELSS as it is commonly referred to as is an open ended tax saving scheme that comes with a three year lock-in and a tax benefit. Investors can save tax of up to Rs. 46,800 in taxes and bring down their overall tax liability by investing in ELSS. ELSS is the only mutual fund scheme that offers tax benefits. As per the Section 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1.5 lacs per fiscal year and save tax on the sum invested.
Benefits of ELSS
Long term capital appreciation
ELSS is an equity oriented scheme that predominantly invests in stocks of publicly listed companies. As per the guidelines, an ELSS fund must invest a minimum of 80 percent of its total assets in equity and equity related instruments of companies spread across market capitalization. Schemes that predominantly invest in the equity market may be volatile for short term investors, but in the long run, they have known to outperform every other tax saving instrument.
Professional fund management
ELSS is an actively managed fund. Like all other actively managed funds, ELSS has a designated team of fund managers who are constantly involved in buying and selling securities so that the ELSS fund is able to leverage the lucrative market conditions. Since the fund managers are actively involved in buying and selling stocks so that the fund can generate decent returns, investors need not worry about managing their portfolios. All they have to do is invest as per their income needs and risk appetite and their money will be managed by a team of professional fund managers.
SIP option
The best part about SIP investing is that investors can invest a sum as small as Rs 500 per month in an ELSS fund. A Systematic Investment Plan or SIP as it is commonly referred to as is a simple and effective way to invest in an ELSS scheme. Investors need not have a large investment sum as they can invest small, fixed sums periodically and save tax. If you are unsure about how much wealth you can create with your SIP investments, you can even use the online SIP calculator, an easy-to-use tool that computes complex calculations and helps investors plan their investments in a better way.
Understanding the lock-in period
ELSS has a short lock-in period that spans over three years. ELSS comes with a predetermined lock-in period of three years. That means if you make your first investment today, you cannot redeem those investments for a minimum of 36 months starting from today. Having said that, if you compare other tax saving instruments under Section 80C, ELSS has the shortest lock-in period.
