Tax-savings is one of the crucial aspects of financial planning in everyone’s life. Many people wait till the end of a fiscal year to plan taxes and fail in their efforts miserably. It is because your investment decisions to achieve specific financial goals define the extent to which an individual can reduce their tax liability. While mutual funds are one of the prime choices of investors, not all funds help in saving taxes. It is where ELSS investments play a vital role.
Equity Linked Savings Scheme (ELSS) is a category of mutual funds that comes with dual benefits of capital appreciation and tax savings. You can avail tax deductions for your ELSS investments as per Section 80C of the Income Tax Act. With Budget 2020 in place, you have an option to opt for a new and simpler income tax regime. However, you will have to forego tax deductions under various sections, including 80C. Whichever tax regime you follow, you need to know well about ELSS.
Let’s start with the basics of ELSS investments.
1. Lock-in Period
There are many tax-saving investment products in the market, including PPF, NPS, and FD. However, most of them have a minimum lock-in period of five years, except ELSS. Your ELSS investment will only be locked in for three years while also helping you save taxes.
2. Investment Options
ELSS investment has two options – dividend and growth. While the former option gives you a regular dividend income, the latter means your investment will get reinvested until you withdraw it. You can select between them depending on your requirements.
3. Flexibility to Choose Investment Mode
Investing in ELSS gives you a choice to invest either in a lump sum or Systematic Investment Plan (SIP) mode. You can invest a specific amount in one go via lump sum mode or plan investing a smaller amount periodically via the SIP route. Also, SIP comes with the automatic deduction of the predetermined amount from your bank account to help you avoid any delays in regular investment.
4. Taxation
You are eligible for an income tax deduction of up to Rs. 1.5 Lakh for ELSS investment. However, you should know that the gains from ELSS are subject to Long Term Capital Gains (LTCG) tax at the time of maturity as defined in the Income Tax Act.
5. Investment Form Submission
You can invest in ELSS in two ways:
- Through Asset Management Companies (AMCs) or mutual fund houses directly
- Through a financial advisor like FinEdge
At the time of investing money in ELSS, you need to fill the investment application form and submit it to the chosen mutual funds company.
6. Investment Statement
After making an ELSS investment, you will get a statement of account from the chosen AMC that verifies your investment. You can use this statement as a proof to get tax benefits while filing the income tax returns.
ELSS Investment for Long Term Goals
One of the best ways to plan investing in ELSS is to pair it with a long-term goal in life. Even though the lock-in period of ELSS investment is three years only, you can choose to reinvest the money at the end of this tenure. Whether it is about buying a home, plan for your wedding, or starting a business in the future, the returns from your investments will help support these financial goals. Keep in mind that your tax planning should be a part of your overall financial plan, not the other way around.