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Tax rules that apply to your Equity Linked Saving Scheme ( ELSS ) investments

Diversified equity funds are known as ELSS Funds. These funds typically invest in equities of publicly traded firms in a predetermined proportion based on the fund’s investment goal. The stocks come from a variety of market capitalizations (Large Caps, Mid-Caps, and Small Caps) and industrial sectors. These funds attempt to maximise long-term wealth appreciation. To generate optimal risk-adjusted portfolio returns, the fund manager selects equities after doing extensive market research. As Per 80c. of the Income Tax Act of 1961, investments in an ELSS fund are eligible for tax advantages. While there is no higher limit to the amount that may be invested, according to Income Tax laws, a max of Rs. 1.5 lakh is subject to a tax deduction, allowing you to save up to Rs. 46,800 every year in taxes.

When you work as a salaried employee, you are required to contribute a specific amount to the Employee Provident Fund (EPF), a fixed-income instrument. ELSS is the greatest alternative for those who wish to balance risk and return in their investment portfolio. Aside from the potential for remarkable gains, ELSS investments qualify for a tax credit under section 80C. While Unit Linked Insurance Plans (ULIPs) and the National Pension Scheme (NPS) provide the same function, they have a longer lock-in period and lower return potential. ULIPs, for example, have a five-year lock-in term. NPS is more of a retirement solution with some equity exposure and the invested amount is locked in until you reach the age of 60.

If you’re a first-time investor, ELSS is a great option since, in addition to tax advantages, it gives you a taste of equities trading and mutual funds. Yes, equity investments come with a greater risk, but only in the short term. The danger is substantially reduced if you spend more than five years. The ideal method to begin investing in quarterly SIPs throughout the year, like with other stock investments, is to start small. When the market is down, SIP in an ELSS fund allows you to acquire additional units while the market is up. When the market is up, SIP in an ELSS fund allows you to produce excellent returns. 

Here are some of the benefits of ELSS Mutual Funds:

The ELSS has one of the shortest lock-in times, which is three years. Fixed deposits with a five-year lock-in period are available, whereas PPFs have a 15-year maturity. Overall, ELSS provides greater liquidity in the medium run.

Higher potential returns: Other 80C investments, such as PPF or FDs, are fixed income products, unlike ELSS, which has a market-linked return. On a medium to long-term investment horizon, ELSS has the potential to produce much more wealth.

Improved after-tax returns: ELSS Long Term Capital Gains are tax-free up to a ceiling of $1 lac. Gains above one million dollars are subject to a 10% tax rate. Lower tax rates combined with larger returns guarantee the highest after-tax profits.

How to Invest in ELSS Mutual funds?

Growth choice: If you choose the growth option, you will not get dividends as a reward. As an investor, you will only get profits at the time of redemption, which helps the overall NAV increase and therefore the profits double. It’s important to remember that the returns are subject to market risk.

Dividend option: With this option, an investor receives advantages in the form of tax-free dividends from time to time. Only when there are excessive earnings, above and above, is a dividend announced.

Option for Dividend Reinvestment: This is an option in which an investor reinvests his or her dividends to increase the NAV.

Investing in a lump sum is not recommended unless the markets are in a negative trend and you are ready to assume higher risk levels and invest for a longer time frame. You miss out on the possibility to buy fund units at different times of the year, which means you’ll have to stay invested for longer than 5-7 years to make a profit.

When the markets are down, you buy more units, whereas when the markets are up, you buy fewer units. As a result, your fund unit purchase price averages out over time and comes out on the cheaper side. When the markets rise, you will benefit from this since you will be able to realise bigger capital gains on redemption.

By Siddhant Dutta