Biju P.
AN EQUITY linked saving scheme (ELSS) is a diversified equity mutual fund scheme with a mandatory lock-in period of three years. Being an equity fund, a minimum of 65 per cent of its assets will be invested in equities/stock markets. An ELSS fund invests across sectors and industries. It can have a tilt towards large-caps and mid-caps, or can be flexi-cap, as per the discretion of the fund manager.
Equity linked saving schemes are also known as tax saving mutual funds, as they help investors save tax up to Rs1.5 lakh under section 80C of the Income Tax Act. Most asset management companies in India have ELSS funds in their product suite, since they offer investors high returns with tax benefits.
The tax benefits
Let us say your total income is Rs12 lakh and you invest Rs1.50 lakh in ELSS in a financial year. The total taxable income drops to Rs10.50 lakh. As with other mutual funds, there is no maximum investment limit in ELSS. But do keep in mind that, only amounts up to Rs 1.50 lakh are eligible for a tax benefit. Also, do note that this exemption limit covers other investments and deductions.
Returns are taxed
Since ELSS has a lock-in period of three years, the gains on these funds are treated as long term capital gains (LTCG) and are taxed at 10 per cent. Prior to 2018, the LTCG on equity was nil. In the Union Budget 2018, however, it was announced that investors will have to pay 10 per cent tax on gains exceeding Rs1 lakh made from the sale of equity or equity oriented mutual funds. Dividend income is exempt from this.
Also, since an ELSS is market linked, there will not be any guaranteed or assured returns.
Advantage over other tax saving instruments
ELSS has many advantages over traditional tax saving instruments like fixed deposits, National Pension Scheme and Public Provident Funds. It has the lowest lock-in period and the returns are generally higher than other tax saving instruments. Public Provident Fund, Employees’ Provident Fund and National Savings Certificate all have a minimum lock-in period of five years.
Help in long-term wealth creation
Many investors believe that it is mandatory to sell these schemes after the lock-in period. That is a myth. An investor may continue with the scheme if it is performing well. Apart from saving taxes, an ELSS can help you achieve your long-term goals.
In fact, it would be advisable for investors to link their ELSS investments to their long-term goals and stay invested in these schemes. Most ELSS funds follow a flexi-cap strategy. So these schemes can invest across market capitalisations depending on the fund manager’s view. However, if an investor is a conservative equity investor, this may not suit him. In such cases, the investor may consider selling the ELSS funds after the mandatory lock-in period and shift the money to a large-cap scheme or any other fund that suits his risk profile.
ICICI Prudential Long Term Equity Fund has consistently given investors a good investment experience. Launched in August 19, 1999, the fund follows a multi-cap strategy and has a growth oriented approach. The fund has given an excess return of 5.8 per cent over Nifty 500 TRI/benchmark since its inception.
The author is an adviser with Devi Krupa Financial Services.