Equity Linked Saving Scheme

In simple terms, the Equity Linked Saving Scheme is an open-ended Equity Mutual Fund that provides an individual with bets returns and great tax benefits. All the tax exemptions that are offered under this scheme are under Section 80C of the Income Tax Act. In ELSS, the lock-in period over these funds is three years. Also, the investor can opt out of the scheme by selling it after this period is completed. Notably, a large part of the capital is invested in the equity funds themselves.

How to Invest in an Equity Linked Savings Scheme?

It is very simple and easy to invest in an Equity Linked Savings Scheme, where an investor can invest a minimum amount of Rs. 500 in the scheme. Apart from this, the investors are also allowed to invest a lump sum amount at a go, or they can also invest on monthly basis in equity-oriented assets by way of Systematic Investment Plans.

Who can invest in ELSS?

For individuals who have just started their careers, the Equity Linked Savings Schemes is one of the best investment options for them. The ELSS carries a lower risk factor which makes it the perfect investment choice for those who are earning less or average salaries. Furthermore, the scheme is also a good option for those who want to save on taxes. Under the ELSS, individuals can start investing as soon as they start earning.

What are the benefits of the Equity Linked Savings Schemes?

  • The scheme has a lock-in period of just 3 years which is quite low compared to other MF options.
  • Once invested in the ELSS, the returns that an investor receives are higher than most other schemes.
  • Most importantly, post the lock-in period the earnings that are made by ELSS are exempted from the tax.
  • An investor can make as much investment as he wants to make in the ELSS as there is no limit to the maximum investment made in this scheme.
  • Under the ELSS, compounding helps investors in increasing their principal amount and earn higher returns.

What are the features of the Equity Linked Savings Schemes?

  • The ELSS enables an investor to choose from the dividend or the growth option. Under the growth option, the investor receives a lump sum amount after the lock-in period. In the case of a dividend option, the investor will receive his dividend regularly in 3 years lock-in period.
  • One of the prominent features of the ELSS is that the tax is not imposed on the returns which are earned from this scheme. Under Section 80C of the Income Tax Act, up to 1, 50,000 of the investment can be claimed for tax deduction from the gross total income.
  • Another important feature is that the investor can use the Systematic Investment Plan in the ELSS for a planned execution of investment and better savings on tax.

How ELSS stands out from other Tax-Saving instruments?

Apart from the ELSS, other tax-saving schemes are available in the market which offer investors with higher returns such as FD, PPF, NSC, and others. The ELSS stands out as compared to others because of its higher returns since the returns offered by other schemes are generally restricted. Another factor is the lock-in period which is just three years, which attracts most investors and makes this scheme one of the best tax-saving instrument.

Now, let’s understand with an example how to Calculate ELSS Maturity Amount :

If you are having a sum of 2 lakh rupees you want to invest in the ELSS funds with a rate of return of 15% for five years. When your investment tenure will end, your maturity amount will be around Rs. 4,02,271.

Also, if you have started a SIP of Rs. 5,000 for five years with an expected rate of return of 15%, you could get Rs. 4,42,873 at the end of the tenure. Notably, the future value of the amount invested can vary depending on various factors & the results provided by this formula is an estimates rather than a guarantee.

Frequently Asked Questions

  • What are ELSS funds?
    The ELSS funds are the tax saving mutual funds. In this, a large part of the funds is invested in equity schemes.
  • What is the lock-in period in ELSS Mutual Funds?
    Most investors opt for the ELSS funds because it has a lock-in period of just 3 years.
  • How much tax benefit can be availed under ELSS?
    A tax benefit of up to Rs. 46,800 can be availed by investing up to Rs. 1.5 lakh per year in ELSS. An individual is also allowed to invest more than Rs. 1.5 lakh in ELSS. However, one is not entitled to tax benefits on investments exceeding Rs. 1.5 lakh.
  • Why to go for the ELSS only?
    An investor must choose this scheme over other tax-saving instruments since this scheme gives higher returns along with tax benefits as well. Furthermore, the lock-in period is also just 3 years.
  • What is the process to invest in the ELSS?
    To invest in the ELSS, an investor must undergo KYC verification. Also, a photo is required along with the PAN and a valid proof of address.
  • Which ELSS is best?
    Several parameters define the good performance of the ELSS funds such as the returns made in past, expense ratios, and financial ratios. For this, an individual needs to understand this basis.
  • Can an investor redeem ELSS before 3 years?
    The ELSS funds have a compulsory lock-in period of three years, where the investor cannot withdraw his/her investment within three years from the date of investment. As such there are no provisions regarding paying a fine and redeeming it within this period.