Things You Need To Know About ELSS Mutual Funds

Posted by Dishika Baheti on July 21st, 2018

Paying taxes is a very painful process for most of us. Every year we have to give out a considerable portion of our hard earned income in the form of taxes. Now, their are certain ways with which we can save taxes but the returns we get on investing into such options are very low and the lock-in period is very high, for ex, public provident funds, which provide an annual interest of 7% per annum which is good, but the minimum lock-in period is 15 years, which is really high. So in this article, we are going to discuss ELSS funds, which not only provide good returns but also have the lowest lock-in period.

What Are ELSS Mutual Funds?

Equity Linked Savings Scheme, also known as tax saver funds is a category of mutual funds that follows a diversified equity portfolio style and are included under Section 80C of the Income Tax Act, making them eligible for tax exemption. By investing in these schemes not only you can enjoy high returns but can also claim deduction up to Rs 1.5 lakh from your taxable income. We will discuss later that how the tax exemption works. These schemes invest in a mix of large, mid, and small cap stocks and are generally good for long term investments. The risk associated with such schemes are moderately high as performance of such schemes depend on the behavior of stock market.

How Tax Deduction Works?

As we discussed above that by investing in ELSS mutual funds we can claim a deduction up to Rs 1.5 lakh from taxable income, but how does this exemption work, that is the main question. Let's have a look.

Let's say your yearly income is Rs 9 lakhs and you age is 46 years, which makes you liable for paying 20% taxes on your annual income. So, the total tax you have to pay if you hadn't made any investments is ELSS is Rs 95,275, while on the other hand if you make an investment of Rs 1.5 lakhs in ELSS’ schemes, then the total tax you have to pay is Rs 64,375. So with the help of ELSS you are making a direct profit of Rs 30,900 in the form of tax exemption.

Now, how this exemption works. Well when you make an investment in ELSS, the investment amount get deducted from your taxable income. In above case, Rs 1.5 lakh are deducted from the taxable income and the tax is calculated only on Rs 7.5 lakhs instead of Rs 9 lakhs.

Benefits Of Investing In ELSS

Investing in ELSS schemes have various benefits. Let's have a look at them.

• Diversity- These schemes follow a diversified portfolio style, which provide them with not only stability but also high chances of growth. Let's say an ELSS fund invests equally in large-cap, mid-caps, and small caps. Now, even if small caps are not performing, fund can get stability through large caps and vice versa.
• Save Tax- This is a major benefit of these schemes which we have discussed above in detail. This is a property which gives this category a special place in the mutual fund market.
• Low Lock-in- Schemes under ELSS category have the lowest lock-in as compared to other instruments that are included in Sec 80C.

This covers up all the basic knowledge that you will need about schemes under ELSS category. These are one of the best options available today as you can not only save tax but can also enjoy high returns, in a single place. So, the next time you plan your tax don't forget to include these schemes in your planning.