Investing in mutual funds is a popular way to grow wealth, and one of the most beneficial types of mutual funds in India is the Equity-Linked Savings Scheme (ELSS). ELSS mutual funds offer a dual advantage of tax savings and long-term capital growth. Let’s explore why they are considered a great option for investors.
What is an ELSS Mutual Fund?
An ELSS mutual fund is an equity-based mutual fund scheme that primarily invests in stocks (equity shares) of various companies. They are designed to help individuals save taxes while also providing the opportunity for capital growth over time. The key feature of ELSS funds is that they offer tax benefits under Section 80C of the Income Tax Act in India. Investments made in ELSS funds qualify for a deduction of up to ₹1.5 lakh from the taxable income, reducing the tax burden.
Key Features of ELSS:
- Tax Benefits: ELSS investments qualify for tax deductions under Section 80C, similar to PPF, NSC, or tax-saving FDs. The amount you invest in ELSS is deducted from your taxable income up to the ₹1.5 lakh limit. The gains earned from these investments are also subject to long-term capital gains (LTCG) tax, but only if they exceed ₹1 lakh in a financial year, and the rate is 10%.
- Lock-In Period: ELSS funds come with a lock-in period of 3 years, which is the shortest among tax-saving options. This means you can’t redeem your investment before three years, encouraging long-term wealth creation.
- Potential for High Returns: Because ELSS funds are invested in the stock market, they can provide significant returns, especially over a long investment horizon. The longer you stay invested, the more likely you are to benefit from market growth.
- Diversification: By investing in ELSS, you gain exposure to a diversified portfolio of stocks, which helps spread the investment risk. These funds typically invest in large-cap, mid-cap, and sometimes small-cap stocks across various sectors.
Example of ELSS Investment:
Suppose you invest ₹50,000 in an ELSS fund. Over the next three years, the value of your investment grows at an average annual return of 12%. After 3 years, your investment would be worth approximately ₹70,000 (₹50,000 growing by 12% annually). This growth is tax-free as long as the gains are under ₹1 lakh per year.
At the time of redemption, if your total long-term capital gains exceed ₹1 lakh, the amount above ₹1 lakh will be taxed at 10%. This makes ELSS a tax-efficient way to grow your money.
Why Choose ELSS?
ELSS funds are ideal for investors with a long-term horizon who are comfortable with the risks of equity markets. They are a great choice if you want to save taxes while also growing your money. However, remember that as with any equity investment, there can be market volatility, so it’s essential to stay invested for the long term.
Conclusion:
ELSS mutual funds offer a blend of tax-saving benefits and the potential for high returns. While they come with market risks, they are an excellent option for those looking to grow their wealth over the long term while saving taxes. Make sure to research and choose the right fund based on your risk tolerance and investment goals.
– Ketaki Dandekar (Team Arthology)
Read more about ELSS Mutual Funds here – https://groww.in/elss-funds