Reduce Your Tax Burden With ELSS Mutual Funds

Of the several types of mutual funds available in India as an investment option, equity-linked savings schemes, i.e., ELSS are known for attracting investors with their tax-saving features. Allocating funds to ELSS funds is regarded as an efficient way to save on taxes when compared to the other investment options that are available under Section 80C of the Indian Income Tax Act, 1961. Also, ELSS funds are known for coming with other advantages like a shorter lock-in period and professional fund management. These features can help you in accumulating wealth in the long term. Listed below is information about ELSS funds and how they can help you in reducing your tax burden.

Understanding ELSS funds:

ELSS mutual funds are known for being managed by well-experienced finance professionals who are referred to as fund managers. Moreover, this type of mutual fund is offered by almost all the fund houses, i.e., asset management companies or AMCs in India. One of the salient features of ELSS funds is that they are the only class of mutual funds that are eligible for tax deductions. By opting for this type of equity mutual fund, you can enjoy tax deductions of up to ₹1,50,000. You can enjoy tax deductions thanks to the provisions under Section 80C of the Indian Income Tax Act, 1961. While you can invest more than a designated amount, an excess of over ₹1,50,000 will not qualify for the tax benefits as is the case for the provisions of Section 80C. The returns earned from ELSS funds are considered taxable with things like the DDT, i.e., dividend distribution tax and LTCG, i.e., long-term capital gains. The tax on long-term capital gains (LTCG) was reintroduced in the 2018-19 Union Budget. Despite the change, ELSS funds have continued to be one of the most preferred options among all the Section 80C investment options. But you must opt for the right type of ELSS funds. ELSS funds can be broadly classified into two:

  • Growth funds:

Growth funds are known for being long-term wealth creation schemes where the entire value of the fund is realised only at the time of redemption.

  • Dividend pay-outs:

They are known for having two sub-categories, namely dividend pay-outs and dividend reinvestments. Under dividend pay-outs, you will get a chance to enjoy tax-free dividends. With dividend reinvestments, your dividends will be reinvested as a new investment.

Why prefer ELSS over other 80C investment options?

Equity-linked savings schemes are known for coming with the potential of offering higher returns and therefore are considered an ideal choice of investment in the long term. ELSS hold their ground in terms of being better than other 80C investment options by providing its investors with higher post-tax returns than other investment options such as the ULIPS and public provident funds (PPFs). Here are some of the reasons for you to consider ELSS for investment:

  • ELSS funds are known for helping acquire wealth for the long term:

As mentioned earlier, ELSS funds are a type of equity-related mutual fund scheme that is known for coming with a lock-in of three years. But once the lock-in period ends, you can opt to keep the funds invested instead of redeeming your ELSS fund. By making this choice, you can achieve your financial goal, which will be to have enough balance at your disposal at the time of retirement planning.

  • ELSS funds are known for coming with tax benefits:

A major reason why people opt for ELSS is that they are known for enabling investors to enjoy tax deductions. These funds get to enjoy tax deductions because of the provisions of the Indian Income Tax Act, 1961 (Section 80C). So, if you were to consider signing up for ELSS, you may get to enjoy a tax deduction of approximately ₹1,50,000 a year.

How are returns on ELSS taxed?

In case you were to choose to redeem your ELSS investment after the end of the 3-year lock-in period, you need to pay a long-term capital gains (LTCG) tax. The revenue generated through the sale of investments in an ELSS that‘s held for over a year is regarded as a long-term capital gain. The LTCG on equity-oriented funds or equity shares for gains exceeding ₹1 lakh in a financial year is taxed at 10%. You are also required to include 4% health & education cess without the benefit of indexation.