Come the end of the financial year, and several investors are on the lookout for the right tax saving investments that can help them reduce their taxable income. One such popular tax-saving investment option is equity-linked savings schemes, or commonly known as ELSS. But are tax saving mutual funds that good? Or they just hyped up? In this article, we will understand if ELSS funds actually make a difference to one’s portfolio.
What are ELSS funds?
ELSS funds are a type of mutual funds that invest a minimum of 80% of their corpus in equity-related securities. These mutual funds are eligible for a tax deduction under Section 80C of the Income Tax Act, 1961 up to Rs 1.5 lac per annum. This is one of the reasons why ELSS mutual funds are popularly termed as mutual funds tax saver. ELSS funds are also accompanied with a compulsory lock-in duration of three years. These funds are known to offer dual benefits to investors in the form of capital appreciation and tax saving opportunities.
Usually, in a particular financial year, ELSS schemes get the most of their inflows from December to March. This is because investors often rush-in to make last moment investments in tax-saving investments.
How do ELSS tax saving funds make a difference to your investment portfolio?
Here are a few parameters that enable ELSS funds to make a difference to your portfolio:
- Dual benefits – ELSS funds enable investors to appreciate substantial returns on their investments when invested for a prolonged duration. As a result, ELSS funds help investors to enjoy twin benefits of capital appreciation and tax-saving prospects.
- Lowest lock-in period – ELSS funds are associated with the lowest lock-in duration as compared to other tax-saving investments.
- Potential to earn substantial returns – As ELSS funds are market-linked, it helps investors to earn substantially higher yields on their investments. Historically, ELSS mutual funds have offered investors with double-digit returns when invested for a long period of time.
- Save tax – An investor can save up to Rs 46,800 per annum by investing in tax-saving investments such as ELSS mutual funds provided that they belong to the highest income tax slab. This helps investors to significantly lower their tax outgo.
- Better post-tax returns – As ELSS funds have a mandatory lock-in period of three years, these funds are subject to just long-term capital gains (LTCG) on redemption. LTCG on equity funds are exempt from any tax for up to Rs 1 lac per annum. Post Rs 1 lac, investors are taxed at 10% without the benefit of indexation.
Even though ELSS funds have a compulsory lock-in duration of just three years, experts advise investors to stay invested for a longer period, so that the ELSS funds can offer their full potential. These mutual fund experts further advise their clients to link their ELSS investments with their long-term investment goals so that one does not get tempted to run in the opposite direction at the slightest hints of uncertainties and volatilities in the market. Happy investing!