An investor is always in search for something extra over and above his returns. ELSS is such an investment that fulfills his wish. ELSS enables investor to enjoy benefits of capital appreciation as well as tax benefits. In this article we understand ELSS in detail.
ELSS is a type of diversified equity mutual fund, which is qualified for tax exemption up to Rs. 1,50,000 under section 80C of the Income Tax Act. It comes with a lock-in period of three years. An investor cannot redeem or transfer the units to another scheme during the lock-in period. Tax benefits can be claimed for the financial year in which the investments were made in ELSS. There are 36 ELSS schemes currently available in the Mutual Fund market, with more than Rs. 70,000 Crore worth assets under management.
An investment in ELSS can be made lumpsum or through SIP. Though in SIP each investment (SIP installment) has a lock-in period of three years.
Example: If you have made a SIP in an ELSS fund, each installment will have its own 3 year lock-in. So, investment on 1st Mar, 2019 must be held till 28th Feb 2022 and investment on 1st Apr, 2019 must be held till 31st Mar, 2022 and so on.
a. ELSS (Equity Linked Savings Scheme) is a Mutual Fund scheme, and it enjoys all the benefits of investing in a mutual fund.
b. It is a tax savings scheme which majorly invests in a diversified portfolio. It shares similar allocation to that of multicap funds, which makes it one of the most preferred tax saving investment.
c. Amongst all the Tax savings schemes, ELSS has the highest prospective returns.
d. ELSS investments have a lock-in period of 3 years.
e. These investments can be made from Rs. 500 and in multiples thereof.
f. There is no upper limit for investments in ELSS, though the tax benefits are restricted to Rs. 1,50,000 as per Sec 80C of the Income Tax Act. However, the returns on investments attract 10 % LTCG (Long Term Capital Gain tax) if returns earned are more than Rs. 1,00,000
g. The investments can be made Lumpsum or through a SIP (Systematic Investment Plan).
h. An ELSS investment being the one which invests in stock markets is therefore subject to market risks.
To understand ELSS taxation, please check our article – Equity Mutual Fund Taxation
We know that investment in ELSS schemes is a tax-saving investment. It comes along with yet another benefit for investors, it has one of the shortest Lock-in-period of 3 years.
If you have made a lump-sum investment in ELSS, then the lock-in is a clear-cut 3 years period, but when it comes to SIP investors get confused. Calculation of lock-in works a bit differently in SIP. Let us understand it with the help of one example.
Firstly, always keep in mind, when you make an investment in a mutual fund you are purchasing the units and not the whole investment as we have explained in our article ‘What is Mutual Fund’
Example: Let us say you have started a SIP on 10th April 2018. So, your investments will be as follows:
Here, each of your investment through SIP shall be considered as a separate one and hence, lock in period of 3 years shall be applicable to each SIP Installment separately. Therefore,
Therefore, each and every installment through a SIP shall have a separate lock in for 3 years.