Equity Linked Saving Scheme, widely popular as ELSS, is an open ended tax saving mutual fund scheme that comes with a three year lock in period and tax benefit. ELSS is the only mutual fund scheme that comes with a tax benefit. According to the Section 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1.5 lakh per financial year in ELSS and claim tax deduction from the same. Apart from providing a tax benefit, ELSS also gives investors an opportunity to receive capital appreciation over the long term.
Here’s an example to help you understand how ELSS investments can help you save tax:
Sabin Samuel is a senior illustrator at a world renowned designer boutique. He draws an annual salary of Rs. 14 lakhs. This lands Sabin the 30 percent tax slab. He learns about ELSS from a colleague and invests Rs. 1.5 lakhs in this tax saver fund. Because ELSS is eligible for tax deduction under Section 80C, Sabin managed to bring down his gross taxable income from Rs. 14 lakhs to Rs. 12.5 lakhs.
Now we all know that ELSS offers a tax benefit. But do investments in ELSS also promise capital appreciation? Let’s find out.
Now before we begin let us make one thing clear. ELSS is a mutual fund scheme. Investments made in mutual funds do not guarantee returns. There is a good chance of your portfolio incurring losses. Hence investors should invest in ELSS depending on their risk appetite.
ELSS is a pure equity scheme. This fund allocates 80 percent of its total assets in stocks and other equity related instruments. Investments made in equity generally offer capital appreciation to those who show patience with their money. Investors should not look at ELSS for short term investment. If you really want to see the scheme’s potential, one needs to give at least five to seven years for the fund to grow. Also, when you invest for the long run you do not have to worry about the daily ups and downs of the equity market. Short term equity is highly prone to the market’s volatile nature. But when you keep a long term investment horizon and invest in ELSS, you not only have to worry about the constant market upheavals, you also stand an opportunity of beating inflation.
When you remain invested in ELSS for the long run, your investments stand a chance of multiplying, thanks to the power of compounding. Compounding in mutual funds refers to the interest that an investment on the interest that it earned from the initial investment amount. The capital gains earned by the fund are reinvested back in the scheme. In the long run, this may help investors in building a wealthy corpus. If you have long term goals like retirement planning or planning a destination for your child, or planning to send them overseas for foreign education or planning to go on a world tour then you can invest in ELSS for the long run.
ELSS can help investors with long term capital appreciation. In order to achieve their goals, they can invest in ELSS via SIP. Systematic Investment Plan, short for SIP is an easy and convenient way to invest in ELSS. One can invest small fixed amounts at periodic intervals in an ELSS fund. In order to get a rough estimate of how much wealth your ELSS funds will accumulate over the period of three years, you can take the help of an online SIP return calculator. However, investors should determine their risk appetite before investing in ELSS. Wealth creation through ELSS investment is possible if you invest according to your risk appetite.