KNOW THE BENEFITS & DRAWBACKS OF INVESTING IN ELSS FUNDS
ELSS mutual funds have grabbed the eyeballs of retail investors in the past few decades. Equity-Linked Savings Scheme, commonly known as ELSS are mandated by the Indian mutual funds’ regulator – Securities and Exchange Board of India (SEBI) to invest a minimum of 80% of their assets in equity and equity-linked securities. Owing to this rising popularity of ELSS funds, retails investors are often left wondering if they should succumb to this growing trend of ELSS tax saving mutual funds or invest in other investment options. If you are one such investor, we aim to offer the benefits and drawbacks of investing in ELSS funds in this article, which might help you with your investment decisions.
Benefits of investing in ELSS funds
Following are some of the benefits of investing in ELSS funds:
- Helps to save tax
ELSS funds are commonly known as tax saver mutual funds as these mutual funds help investors to reduce their tax outgo by offering a tax deduction under Section 80C of the IT Act, 1961 of up to Rs 1.5 lacs per annum. An investor can save up to Rs 46,800 by investing in Section 80C investments provided that they are belonging to the highest tax slabs. What’s more, ELSS funds are the only type of mutual funds that offer tax deductions and tax benefits to investors.
- Lowest lock-in period
Before you invest in tax-saving investments, you must be wary of the lock-in duration associated with that particular type of investment. ELSS funds enjoy the lowest lock-in period against other Section 80C tax-saving investments at just three years. Other tax-saving investments have a lock-in duration anywhere from 5 years to 15 years.
- Helps to earn substantial returns
ELSS mutual funds not only helps to save tax, but also helps to earn substantial returns on their investments. This is due to the fact that these tax saver mutual funds allot a majority of their assets (at least 80%) towards equity investments, offering higher potential for substantial returns. This is why these tax saver mutual funds are believed to provide dual benefits to investors (tax benefits and capital appreciation).
- Lower tax on capital gains
As ELSS funds have a mandatory lock-in duration of three years, capital gains earned on ELSS investments are classified as long-term investments. LTCG or long-term capital gains are taxed at 10% per annum for gains above Rs 1 lac* as opposed to STCG (short-term capital gains) which are taxed at 15% per annum.
Drawbacks of investing in ELSS funds
One of the biggest drawbacks of investing in ELSS mutual funds is that the tax deduction of up to Rs 1.5 lac per annum are not subject to just Section 80C investments. In simple terms, the tax deduction of up to Rs 1.5 lac is cumulative tax deduction for Section 80CCC and Section 80CCD as well.
An investor can invest in ELSS through lumpsum mode of investment or SIP investment. Irrespective of the mode of investment you choose to invest in ELSS funds, make sure that the objectives of the ELSS funds are in line with your financial objectives, risk appetite, and investment horizon. Happy investing!
*Long-term capital gains on equity funds of up to Rs 1 lac per annum are exempt from paying taxes.