Investors’ mindsets have changed in recent times in India. They are especially keen to invest in schemes like mutual funds with traditional investments that offer tax benefits. Experts say it’s an effective way to reduce your tax burden while leveraging the power of equity markets. In India, tax-saving mutual funds, mainly equity-linked savings schemes, have become increasingly popular in recent times.
These are mutual funds that invest primarily in equity and equity-related instruments, and enjoy tax benefits under Section 80C of the Income Tax Act, 1961. In this background, let us delve deeper into the details of the ELSS scheme.
Benefits of ELSS Scheme:Investments in ELSS under section 80C under the old tax system offer a Rs. 1.5 lakh tax exemption. While this helps save taxes, ELSS has a mandatory lock-in period of 3 years. ELSS funds mainly invest in equities, providing the opportunity for higher returns. However, they also come with high risks due to market volatility.
You can choose between growth and dividend options based on your financial goals. The growth option reinvests profits, while the dividend option provides periodic payments. Long-term capital gains above Rs. 1 lakh are taxable in a financial year.
Investing in ELSS funds can be done through a direct plan or a regular plan. The direct plan involves investing directly through a mutual fund website or app, which typically has lower expense ratios. On the other hand, the regular plan has a higher expense ratio and requires investing through an intermediary like a broker or distributor.
If you invest Rs. 1.5 lakhs, your taxable income under Section 80C would be reduced by the same amount. For those falling under the 30% tax bracket, this could save you around Rs. 46,800 in taxes, including cess. After 3 years, your investment may grow to Rs. 2 lakhs, with Rs. 50,000 taxed at 10% on Long Term Capital Gains.
ELSS presents an excellent investment option for individuals seeking to save taxes while aiming for potential wealth creation. Experts emphasize the importance of understanding the risks and returns associated with these funds. While ELSS offers benefits, it’s crucial to consider the lock-in period and market risks before investing. Consultation with a financial expert is recommended to align ELSS with your financial goals and risk tolerance.
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