Understanding the Basics of ELSS

What is ELSS?

ELSS is the short form of Equity Linked Savings Scheme.

Now, being an equity oriented mutual fund it invests more than 65% of its investment in Equities, the ELSS has market risks as well as rewards. Apart from it, under Section 80C of Income Tax Act, ELSS also helps you save taxes. You can invest in ELSS through the Demat account via ECS or through Cheque.

What is the Lock-in Period of ELSS?

ELSS has a lock-in period of 3 Years.

Which means that you cannot sell your funds before three years from the date when you invested.

This Lock-in period is applicable to each portion individually, i.e., if you invested x amount in April 2015, and y amount in February 2016, you’ll be allowed to withdraw the full returns of x in April 2018 and of y in February 2019. However, you can keep the invested amount for more than Three years.

Two Options of ELSS Funds

While you invest in ELSS, you’ll be given two alternatives.  Dividend Option and Growth Option.

Dividend Option

This lets you receive the dividend on your investments at Regular intervals. This lets your returns be reinvested in the same ELSS, summing up to be a larger amount.

Growth Option

With this option, you get timely returns on your investment. Plus, these returns are not Taxable. This option involves market risks, but the returns are worth it.

As ELSS is an equity fund, it’s prone to market risks. So, it doesn’t always assure good returns. One needs to do proper research and figure out it’s performance over the course of years.

How to choose the right fund?

One should always check the record of particular ELSS fund before investing in it. Compare the returns of the short-term (six months to a year), medium-term (three years) and long-term (five-six years) horizons with the benchmark you have set for your future.

It is also advisable not to put a lump amount in an ELSS fund at once. One always has the Systematic Investment Plan (SIP), in which they are allowed to put monthly amount (minimum Rs.500).

Head of Income and Taxation

The returns of ELSS fall under the head Income from Capital Gains.

After one year of investing, the returns on ELSS are considered Long term Capital Gain. Thus, when you withdraw the full amount after the lock-in period of Three years, the amount will be considered Long term Capital Gain.

This amount is not Taxable.

On the other hand, the annual amount invested in ELSS is fully deductible from taxes provided it is upto 1,50,000. Meaning, if you have the annual income of 10,00,000 and you invest 2,00,000 in your ELSS, the total taxable income will be Rs. 10,00,000 minus Rs. 1,50,000 (limit prescribed by government), which is Rs. 8,50,000.

Sale and purchase of ELSS are subject to Securities Transaction Tax (STT) and as per section 10(38) of the income tax act, long term capital gains on sale of securities which are subject to STT are exempt from tax.

However, if you suffer loss at the end of lock-in period, you can’t set it off against other incomes.

In order to Invest money that helps with Tax Deductions, one can also consider the option of ULIP. Here’s how ULIP and ELSS are different:

Attributes	ELSS	ULIP
Nature	It is solely an investment option.	It is a combination of insurance and investment.
Investment	They are Equity based funds that primarily invest in shares or options related to shares	One part of the amount goes to investment while the remaining part is invested in debt or equity related products.
Lock in Period	The lock-in period is of 3 years	The lock-in period is of 5 years
Return on your Investment	This type of investment is pretty transparent about how the fund operates and the places where investments are done. This makes the returns easily understandable	There are hidden fees deducted when one pays the premium. Fees like morality charges, administration expenses, fund management fees. The balance amount is invested.
Tenure	You are not compelled to hang on for many years because of the simplicity of the process.	Experts comment that you need to wait till almost 12-15 years to get the best overall Returns.

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