Equity Linked Saving Schemes (ELSS) of Mutual Funds are fast becoming popular tax saving instruments. Under Section 80C of the Income Tax Act, investments up to Rs. 1,50,000 in any ELSS Fund is eligible for tax deductions in the given financial year.
While the funds themselves are managed in a manner quite similar to a diversified equity fund, there are a few unique facts that make it attractive to the tax planner in you.
Gateway to Equity
Investing in an ELSS fund instills discipline in the average equity investor. While there are a sea of Mutual Fund options to choose from that may or may not be suitable for your needs, an ELSS fund is a must-have in your portfolio if you are eligible and looking to save tax.
Keeping in mind that tax planning is a basic requirement, an ELSS fund often serves as the first Mutual Fund in an investor’s portfolio, thereby serving as an introduction to the wider world of equity.
Tax Treatment
Investments in an ELSS fund are locked in for a three-year term, offering tax-free redemptions after this time period. This makes them different from other instruments available under Section 80C – such as the NSC or th5-year bank Fixed Deposit where the interest income earned is treated as fresh income and taxed accordingly. This is not the case in ELSS funds, counting as one among their many advantages for the retail investor.
Redemption Pressures
Unlike other Mutual Fund schemes, the three year lock-in period allows fund managers to manage such schemes without the constant pressure of redemptions that conventional funds may be subject to. He or she can choose to deploy money in value picks that deliver over the long term, and this typically proves to the investor’s benefit.
Even if you are a conservative investor, you can most certainly consider having an ELSS fund in your portfolio. You can remain invested even after the 3 year lock-in, considering equity as a long term financial avenue to begin with.
As always, you are well advised to run an SIP (Systematic Investment Plan) in such a scheme through the course of a financial year, over putting a lump sum investment as the deadline nears. While each SIP instalment is locked in for a period of 3 years, it ensures that you negate the chances of catching a market high.
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