What is Equity Linked Savings Scheme ?

Majority of us rush up to our auditors/financial planners during the month of March for tax planning in order to invest upto Rs. 1 lakh that qualifies for tax exemption under section 80C of the Income Tax Act. We end up in paying LIC premium, PPF, NSC, 5 year bank FDs and other traditional tax savings instrument. Let me throw light on another option available to us – ELSS.

An ELSS – Equity Linked Savings Scheme is akin to a Diversified Equity Fund. It is a type of mutual fund that qualifies for tax exemption under section 80 c.  Also unlike those equity funds which require minimum investments of Rs. 5000, one can invest in ELSS with as low as Rs. 500 by means of SIP (Systematic Investment Plan). The returns from ELSS depend on the stock market and hence tend to be volatile, but then they are generally higher than the returns generated from traditional tax saver instruments.

Let’s find some more information on this scheme.

An ELSS is an equity oriented mutual fund scheme in which the majority corpus (about 80-100%) is invested in equities. As the allocation is done in equity which are considered as high return assets, the primary aim of such funds is capital appreciation. As it is linked to equity, it carries higher risk and is not as safe as NSC, PPF etc. It has a 3 year lock in period (which is very less compared to NSC, PPF etc.) post which it is like an open ended mutual fund. Investor needs to pay tax on premature withdrawal.

ELSS has 2 options: Growth Option and Dividend Option.

It is a classic investment option as it offers two benefits at once:

1. Capital Appreciation

2. Tax benefits

Tax Benefits in ELSS: Investment in ELSS is deductable from taxable income, hence reducing the taxable amount for the investor. Basically, the investor shall save tax at a rate depending on his income slab.

Tax free returns: Income/Returns on ELSS schemes (dividend and on redemption) is tax free under EEE (Exempt – Exempt – Exempt) regime of the Income Tax Act.

Hence, if you wish to save tax while offering your portfolio an extra edge on investing long term, ELSS schemes are designed for you!