Tax saving is an essential aspect of our financial lives, and managing taxes efficiently is an art. If mastered, it can resolve many of your financial challenges. When it comes to saving taxes, most of us wait until March because we habitually push everything to the last minute, just like school assignments. This procrastination often leads to choosing the wrong products, especially for new investors who may not have much knowledge about investments or tax-saving strategies.
Before making any decisions, consider one of the most popular tax-saving options: tax-saving mutual funds.
Mutual funds have become the top choice for investors aiming to achieve their financial goals.
What is ELSS?
ELSS stands for Equity Linked Savings Scheme, a category of mutual funds that helps in saving taxes. ELSS mutual funds offer the dual advantage of capital appreciation and tax savings under Section 80C of the Income Tax Act. They fall under the equity category (open-ended), meaning more than 65% of the money is invested in equity. You can save taxes of up to Rs. 46,800/- (considering a 30% tax bracket, including cess) under Section 80C. ELSS funds offer two investment options:
- Growth
- Dividend (including dividend reinvestment and dividend payout)
An individual is not liable to pay tax on dividends received from mutual funds if the amount is below Rs. 10 lakh. However, if the amount exceeds this limit, the investor has to pay 10% of the total earnings as tax during that year. On the flip side, the government has made it mandatory for companies and mutual fund houses to deduct taxes from the dividends distributed before disbursing them, under Section 115-O of the Income Tax Act, 1961.
Features of ELSS Mutual Funds
1. Lowest Lock-in Period
There are other tax-saving products available in the market, like PPF, NPS, or FDs, which have a lock-in period of more than 5 years. ELSS mutual fund is unique in offering tax benefits with a minimum lock-in of just 3 years.
2. Tax Saving
ELSS is a type of mutual fund that allows a deduction of up to Rs. 1.5 lakhs from total income under Section 80C.
3. Dividend and Growth Options
You can choose to invest in either the dividend or growth option, depending on your financial needs. In the growth option, the money is reinvested and continues to grow until you redeem it. In the dividend payout option, dividends are paid out periodically.
Example of ELSS Investment
The Axis Long Term Equity Fund is one of the top ELSS mutual funds that has consistently delivered strong returns over the years. It primarily invests in high-quality companies with a proven track record, offering both growth potential and tax-saving benefits.
- Growth Option: If you invest Rs. 1.5 lakhs in the Axis Long Term Equity Fund under the growth option, your investment will continue to grow over time. You won’t receive any payouts during the investment period, but your returns will compound, potentially leading to significant wealth accumulation by the end of the lock-in period.
Dividend Option: Alternatively, if you choose the dividend payout option, you could receive periodic dividends from your investment. These dividends are tax-free up to Rs. 10 lakh, providing you with a steady income while still enjoying the benefits of tax savings.
Advantages of ELSS Mutual Funds
Short Lock-in Period
ELSS mutual funds has a lock-in period of just 3 years, after which you can withdraw 100% of your investment.
Transparent Portfolio
The portfolio in which your money is invested is transparently available to all investors.
Flexible Investment Modes
ELSS provides the flexibility to invest via SIP (Systematic Investment Plan) or lump sum.
Competitive Returns
The returns generated by ELSS funds are often better than those of competing products. However, the comparison of ELSS with other products is depicted below.
No Maximum Investment Limit
There is no maximum limit for investment in ELSS. Even once your tax limit is exhausted, you can still invest in ELSS mutual funds; however, tax savings are capped at Rs. 46,800/- under Section 80C of the Income Tax Act, 1961.
Disadvantages of ELSS Mutual Funds
Equity Exposure
ELSS is an equity-linked investment, so it’s not suitable for conservative investors who want to avoid exposure to equity markets.
Tax on Long-Term Gains
The money you receive after the 3-year lock-in period will be taxable as per long-term capital gains tax.
No Guaranteed Returns
Like all mutual funds, ELSS does not guarantee returns.
Conclusion
In conclusion, ELSS mutual funds like the Axis Long Term Equity Fund offer a compelling mix of tax savings and potential for capital growth, making them an attractive option for those comfortable with some level of equity exposure.
While the shorter lock-in period and flexibility in investment modes add to its appeal, it’s important to consider your risk tolerance before investing. As with any financial decision, understanding the nuances of ELSS mutual funds and how it fits into your overall financial plan is crucial for making the most of this tax-saving option.
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