As per the Income Tax rules in our country, there is no tax on annual income up to Rs. 2.5 lacs. To encourage saving, the government provides an exemption of an additional Rs. 1.5 lacs (under section 80 C of Income Tax Act). There are three types of tax saving investment that fall under the purview of Section 80C. The most popular among them are: Public Provident Fund (PPF), National Saving Certificate (NSC), and Equity Linked Saving Scheme(ELSS).
ELSS are diversified mutual funds with a minimum 80% of the investment in equity and equity related securities. There are a few things you should know before investing in ELSS.
Lock in period:
ELSS schemes have the lowest lock-in the period among the three tax saving investments. ELSS has a locking period of 3 years, while for PPF its 15 years and NSC its 5 Years. Which means you can redeem your investment quicker if required from ELSS.
Also Read: 12 Ways You Can Save Tax in 2019
Amount to be invested:
Under Sec 80C the maximum allowed tax exemption is Rs 150000. You have to distribute your investments judiciously. If you have already claimed some of the tax exemption by tax saving investments, then you should calculate and allocate the amount for ELSS. If you are investing 50000 per annum in PPF, then you should not invest more than 1 Lac in ELSS.
ELSS schemes invest money in equity and equity related securities, which do have higher volatility associated with it. However, a comparison over the long-term indicates that equities tend to outperform other asset classes. The caveat here is that in order to reap the maximum benefits of equity investing, one needs to be invested for the long term.
Type of schemes:
There are 2 types of ELSS funds-
- Dividend funds- Further classified as Dividend payout and Dividend Reinvested. As the name suggests, dividend payout pays you the dividend and Dividend Reinvested reinvests the dividends to purchase additional units of the scheme.
- Growth funds- The growth is reflected in NAV and can be realized at the time of redemption. These are for long term wealth creation.
If we calculate the effective yield of ELSS, it increases due to the tax exemption provided. As per the current laws, the long term capital gains will be applicable at a flat rate of 10% for profit earned over and above Rs 1 lac per annum. This makes it all the more beneficial to invest in ELSS.
Mode of investment:
Like any other mutual fund scheme, ELSS is a tax saving mutual fund scheme available in both Lump sum and SIP. We can select the mode of investment as per our requirement. If we are investing towards the end of the fiscal year, for example in January, then it might be better to opt for lump sum investment to take benefit of the total exemption limit. On the other hand, if we are able to schedule our investments at the start of the fiscal year then it might be better to opt for SIP.
Best ELSS Mutual Funds:
In order to select the top ELSS funds to invest in, one should keep a few factors in mind.
- Consistent Performers
- History of Fund Manager
- Portfolio of ELSS Scheme
- Lumpsum or SIP, Dividend or Growth
- The risk profile of the investor