What is ELSS Funds & How to Invest in India?

Investors often seek ways to grow their wealth, earn regular income, and reduce their taxes. Among the many investment options available, most come with taxes on the returns they generate. This is where ELSS funds become useful. Equity Linked Savings Schemes (ELSS) are mutual funds that not only invest in the stock market but also offer tax benefits.

What are ELSS Funds? 

ELSS funds are equity funds that majorly invest in the stock market. They are also known as tax-saving schemes because they offer a tax exemption of up to ₹1,50,000 from your annual taxable income as per Section 80C of the Income Tax Act.

As the name implies, ELSS funds is an equity-focused scheme with a required lock-in period of three years. Many taxpayers use ELSS funds to benefit from this tax exemption. When you invest in ELSS, you can receive tax exemption on up to ₹1,50,000. After the three-year period, any income you earn from this investment will be considered long-term capital gain and will be taxed at 10% if your gains exceed ₹1 lakh.

ELSS Mutual Funds features: 

Here are some key features of ELSS funds:

• At least 80% of the fund’s money is invested in stocks and equity-related instruments.
  

• The fund diversifies its investments across various market sizes, themes, and sectors.
  

• There is no upper limit on how long you can invest in an ELSS fund, although there is a 3-year lock-in period.
  

• You can get a tax exemption on the amount invested under Section 80C of the Income Tax Act.
  

• Any income earned is classified as long-term capital gain and taxed according to current tax rules.

How do ELSS Funds Work? 

ELSS funds are equity funds with a varied mix of investments. They mainly put money into stocks of publicly traded companies across different sizes (large, mid, and small) and sectors. These funds aim to grow your wealth over the long term. Fund managers choose stocks based on thorough market research to balance risk and returns.

Investments in ELSS funds qualify for a tax deduction under Section 80C of the Income Tax Act of 1961. You can get a tax deduction of up to ₹1.5 lakh for your investments. By investing this amount, you could save up to ₹46,800 on your taxes each year.

How to Invest in an ELSS Fund in India?

You can invest in ELSS the same way you invest in any mutual fund.

• By using platforms like Groww, HDFC securities, etc, to invest.

• By investing through your existing demat account.

• By going through fund registrars.

• By working with a financial agent.

Why should one invest in ELSS Tax Saving Mutual Funds?   

ELSS Tax Saving Funds offer several advantages:

• Diversification: ELSS funds invest in various types of companies, including small, medium, and large ones, across different sectors. This approach helps to spread your investments and lower risk.

• Low Minimum Investment: You can start by investing with as little as ₹500, so you don’t need a large amount of money to get started.

• SIPs: You can invest in a lump sum or use the SIP (Systematic Investment Plan) method, which lets you invest small amounts regularly. This approach not only provides tax benefits but also helps build wealth over time.

You can invest as much as you want, but the tax benefits are limited to ₹1.5 lakh according to Section 80C of the Income Tax Act. Additionally, you can keep your investment in the fund beyond the three-year lock-in period for as long as you prefer.

Taxations for ELSS Funds: 

Since ELSS funds are locked in for three years, you can only realize long-term gains. These gains are tax-free up to ₹1 lakh per year, with any amount above this taxed at 10%.

Under Section 80C of the Income Tax Act, you can claim a tax deduction for investments up to ₹1.5 lakh in ELSS and other eligible instruments such as NSC and PPF.

After the three-year lock-in period, any gains are considered long-term capital gains (LTCG). LTCG up to ₹1 lakh per year is tax-free, while any amount above this is taxed at 10% without adjusting for inflation.

FAQ’s 

Q1. What are ELSS mutual funds?

ELSS (Equity Linked Savings Scheme) mutual funds are a type of diversified equity fund. They invest at least 80% of their assets in stocks and related securities, with a small portion in debt instruments.

Q2. Are ELSS funds risk-free?

ELSS funds are not risk-free. They majorly invest in stocks of companies with strong growth potential. Although they offer tax savings, they are most suitable for investors who are aware of and comfortable with the risks of equity investments.

Q3. Can I withdraw my ELSS investment after three years?

Yes, you can withdraw your investment from ELSS funds after the three-year lock-in period. For lump sum investments, you can withdraw the entire amount after three years. For SIP (Systematic Investment Plan) investments, each SIP must complete the three-year period before withdrawal.

Q4. Who should invest in ELSS funds?

ELSS funds are ideal for salaried individuals and first-time investors looking to save on taxes while investing in equities.

Q5. What is the investment focus of ELSS funds?

ELSS funds invest minimum 80% of their assets in stocks.

*Disclaimer: This information is for private use only and does not constitute investment advice. Recipients must assess risks and seek advice from financial, legal, and tax professionals. Private market investments & Mutual fund investments carry risks, and there are no guarantees of returns or capital protection. We are not liable for investment decisions