What is ELSS and how it can save your tax?

what is ELSS and how you can save tax

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It is every tax payers duty to disclose all incomes and pay tax for it as it helps in our country’s development. Tax evasion is a crime. But there are some ways you can legally save tax. According to Section 80C of Income Tax Act when you invest your money in Life insurance, Public Provident Fund, National Savings Certificate or Tax  savings Fixed Deposits, etc. But there is another way in which one can save tax. That is by investing in Equity Linked Savings Scheme that is ELSS.

What is ELSS?

Now what is ELSS? It is a diversified equity mutual fund which is eligible for tax exemption under the Section 80C of the Indian Income Tax Act. A diversified equity mutual fund in simple language is a mutual fund which is invested in stocks of companies or sectors which can be large, medium or small. Hence it is called as ‘diversified’. The aim of the Fund is to give maximum returns for investors. ELSS is recommended because it gives you gains and it also saves tax for you under 80C. Keep in mind that tax exemption is only till Rs. 1,50,000 invested in ELSS.

A Comparison of lock in periods

Compare ELSS with PPF or NSC or tax savings Fixed Deposits. PPF requires a lock in period of 15 years and tax saving Fixed Deposits which require a lock in period of 5 years. NSC has five years lock in period. But, ELSS has only a three year lock in period which is beneficial.  If you opt for Growth option, you will get a lump sum amount at the end of three years. If you opt for Dividends option, you get dividends even during the lock in period of your ELSS.

Returns Not Taxable

Amount invested in National Savings Certificate and Fixed Deposits are tax exempted, but the returns from them are taxable. This is where ELSS wins hands down. Not only the amount invested in ELSS is tax free, the returns are also free of tax. You can even choose to invest as low as Rs. 500 per month in ELSS or you can invest lump sum at one time but it depends on your financial condition.

Wise Decision

The option of investing in ELSS is a wise decision as many tax payers are looking for legal ways to save some tax. But you need to do a little homework when it comes to choosing which fund to invest. If you are going to look at the past performance of the fund, well and good. But other parameters must not be overlooked as market keeps on fluctuating. A good advisor can be handy to minimize the risk.

Final Words

Apart from saving tax, invest in Equity Linked Savings Scheme for your short term and long term goals. As I told you before it is the only mutual fund which has tax exemption under 80C, it also has many other benefits. But before investing, consult an advisor for minimizing risks apart from checking the performance of the funds as market fluctuates.

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Thanks for taking the time to read this article. I hope some of your doubts regarding ELSS and how to save tax by investing in ELSS is solved. Keep visiting for more such interesting ways to save tax.

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