How Tax Saving Mutual Fund ELSS Helps to Save Tax
14 February, 2023
Equity Linked Savings Scheme or ELSS is an equity fund – i.e., it is a mutual fund scheme which mainly invests in equities, with at least 80% of allocation in this asset category. While equities can be volatile over the short term, they are popular among investors due to their potentially good yields.
However, wealth creation is not the only reason that ELSS is popular among investors, especially the salaried class. It is also a tax-saving investment under section 80C of the Income Tax Act, and the only class of mutual funds covered under this section.
ELSS allows tax rebate on investments of up to ₹ 1.5 lakh a year, which can help investors save up to ₹ 46,350 a year in taxes.
How ELSS saves tax outgoings
It is on account of its tax saving attribute that towards the end of every financial year, there is inevitably a scramble among taxpayers to invest in ELSS.
ELSS investments come with a mandatory lock-in period of three years, which means you cannot withdraw the investment until it completes 36 months.
One of the significant advantages of ELSS is that investments can be made in lump sums or through Systematic Investment Plans (SIP), and there is no limit on the amount you can invest.
Let’s take a look at an example of how much investors with different taxable incomes and falling in different tax brackets can save if they invest ₹ 1.5 lakh in ELSS:
Example 1:
Person A earns an annual income of ₹ 5 lakh
- The tax slab for income between ₹ 2.5 lakh and ₹ 5 lakh is 5%
- The tax liability before ELSS would be ₹ 12,500
- After investing in ELSS, this tax liability will be ₹ 5,000
- The total savings in this situation will be ₹ 7,725
Example 2:
Person B earns an annual taxable income of ₹ 8 lakh
- For income between ₹ 5 lakh and ₹ 10 lakh, the tax slab is 20%
- The tax liability before ELSS would be ₹ 72,500
- After investing in ELSS, the tax liability will be ₹ 42,500
- The total savings in this scenario becomes ₹ 30,900
Example 3:
Person C earns an annual income of ₹ 12 lakh
- The tax slab for income exceeding ₹ 10 lakh is 30%
- The tax liability before ELSS would be ₹ 1,72,500
- After investing in ELSS, the tax liability will be ₹ 1,27,500
- This takes the total savings to ₹ 46,350
Please note: The total savings include education cess of 2% and higher education cess of 1%.
The other advantage: how ELSS creates wealth
The biggest advantage ELSS offers is the three-year lock-in period, which is the shortest among all tax-saving options, which means your investment is not blocked beyond 36 months. However, financial advisors recommend staying invested in an ELSS scheme longer than the mandatory period (perhaps, five to seven years) as it can be more fruitful for investors. This is because equities have generally performed better over longer periods.
Moreover, financial advisors say the chances of generating a higher real rate of return – i.e., taking into account the impact of inflation – is greater for ELSS investments, as compared to other tax-saving instruments under Section 80C of the Income-Tax Act.
While ELSS investments are geared towards saving tax, earnings from these investments are also tax-free. It is important to plan redeeming your gains in a way to minimise capital gains tax as it is applicable on gains of over ₹ 1 lakh, at 10% per annum for a holding period exceeding a year.
So, how can ELSS meets financial goals?
Given the potential of higher returns for ELSS investments over the long-term, these schemes are ideal for meeting big-ticket, long term financial goals, such as buying a house, children’s higher education expenses, wedding expenses, or even retirement.
Additionally, investing in two or three ELSS schemes can offer exposure to different market capitalisations and diverse industries, and enhance the potential of higher returns.
Start your ELSS investments with ease
One of the best things about this investment is you can start your journey quite easily. There is a wealth of information online, including various funds and how they have performed so you can make an informed choice. You can also choose whether you want to start your investment as an SIP or lump sum, and over your preferred time period in ELSS funds. You can even use a mutual fund calculator to get a sense of how much your investment can grow during a certain period, which is useful when planning for big financial goals.
HDFC Bank offers a quick three-step, paperless process to open a Demat Account, through which you can invest in all kinds of investments, including mutual funds, IPOs, Exchange Traded Funds, and more. You can access several benefits with an HDFC Bank Demat Account, such as Relationship Manager services, easy fund transfers, discounts and preferential pricing, low brokerage plans and much more. With these advantages, you can get heads start in your financial planning journey and secure your future.
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Wish to know more about ELSS? Here’s A Complete Guide On ELSS Funds.
*Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.
