Saturday, January 15, 2022

What is an Equity Linked Savings Scheme (ELSS)?

There are different types of mutual fund schemes available in the market offered by different asset management companies. So as an investors, one has to deal with different types of mutual funds such as debt funds, equity funds, and ELSS etc. depending on assets classes in which these mutual funds invest. It is very important that as an investor must understand these mutual funds for efficient allocation of funds. The following sections discuss Equity Linked Saving Schemes (ELSS).

What is an Equity Linked Savings Fund (ELSS)?

Equity-Linked Savings Scheme (ELSS) is an equity mutual fund scheme which invests at least 80 per cent of its assets in equity and equity-related instruments. Rest of the assets could be invested in other classes of assets. ELSS can be either open-ended or close ended funds.

Types of Equity Linked Savings Fund (ELSS)

ELSS funds are broadly classified into two categories.

Growth Fund: 

Growth funds are long-term wealth creation platform for investors where the full value of the fund is realized at the time of redemption.

Dividend Funds:

Dividend funds have two sub-categories such as Dividend Payout and Dividend Reinvestment Funds. Under the Dividend Payout option, investors receive tax-free dividends. In the case of Dividend Reinvestment option, dividends are reinvested as a new investment.

Tax Benefits on ELSS

Investments in ELSS qualify for tax deductions under Section 80C of the Income Tax Act up to the overall limit of ₹1.5 lakh in an assessment year. in other words, invested amount up to ₹1.5 lakh is eligible for deduction from the taxable income. So the tax liability of the investors goes down. So the investment in ELSS provide double benefit of investment and lower tax liabilities.

Lock-in Period 

The investments in Equity Linked Savings Schemes (ELSS) are subject to a lock-in period of three years. The tax benefits, the investors cannot withdraw the invested amount as well as the returns from the scheme before the lock-in period. That means the redemption of ELSS is possible only after the lock-in period.

Tax on Capital Gains on ELSS

The redemption proceeds from ELSS is not completely tax free. The Long-Term Capital Gains on ELSS are tax-exempt up to ₹1 lakh in a year. Any gains above this limit of ₹ 1 lakh attract a long term capital gain tax at the rate 10% plus applicable surcharges and cess.

Tax on Dividend from ELSS

Any dividends received from ELSS investments are added to taxable income of the investors and are taxable at the applicable tax rate depending in the investor's tax rate.

Risk Associated with ELSS 

Investment in ELSS is slighter a risky proposition in comparison to PPF, fixed deposits and debt mutual funds.

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What is an Equity Linked Savings Scheme (ELSS)?

There are different types of mutual fund schemes available in the market offered by different asset management companies. So as an investors...