What is the full form of ELSS?

Introduction

Equity Linked Savings Scheme (ELSS), a form of mutual fund, typically invests in equities and other securities with an equity component. Investors cannot withdraw their money from an ELSS before the three − year lock − in period expires.

An investment made in an ELSS is eligible for a tax deduction of up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act. ELSS is recognised as a tax−efficient investment choice since it has the potential to generate higher returns than other tax−saving investment alternatives like the Public Provident Fund (PPF), National Savings Certificate (NSC), and Fixed Deposits (FDs). Based on market conditions and investment goals, professional fund managers that oversee ELSS distribute assets across various equity−related instruments and equities.

There are ELSS choices for growth and dividend. The full investment amount is reinvested; therefore, the growth option's gains are only realised at the time of redemption after the lock−in period has expired. Investors who select the dividend option will frequently be paid out in the form of tax−free dividends.

ELSS is a suitable investment choice for individuals with a big appetite for risk and a long investment horizon. However, investors should consider a number of factors prior to investing in ELSS, such as past performance, fund manager experience, fee ratio, and investment purpose.

Features of ELSS

ELSS has the following characteristics:

• Tax advantages − ELSS provides tax advantages under Section 80C of the Income Tax Act up to a maximum of Rs. 1.5 lakhs.

• Investments made with equity − ELSS mostly invests in securities that follow the performance of the stock market. It is therefore a high−risk investment option, but it may also result in superior long−term returns.

• There is a three−year lock−in period for the ELSS. Investors are unable to withdraw their money until the lock−in period has ended.

• Professional fund managers handle the administration of ELSS and allocate investments among various stocks and securities that are related to equities in accordance with the state of the market and investment objectives.

• Regarding liquidity, ELSS is a viable investment option. Investors may take money out of their investments when the lock−in period is over.

• Due to the investment's spread across numerous shares and equity−related assets, ELSS provides benefits for diversification.

• Flexibility − Because ELSS is available in both growth and dividend options, investors have the freedom to choose the investment that best meets their investing objectives.

Benefits of ELSS

ELSS has the following benefits, listed as a few of them:

• Tax advantages − ELSS provides tax advantages under Section 80C of the Income Tax Act up to a maximum of Rs. 1.5 lakhs. This makes it appealing to investors looking for possibilities to invest with a tax benefit.

• High returns − ELSS invests primarily in assets that have the potential to provide higher returns over the long term, such as stocks and assets linked to stocks. Historically, ELSS has generated long−term returns of roughly 12–15%.

• Short term lock−in − Compared to National Savings Certificates (NSC) and Public Provident Fund (PPF), two additional tax−saving options, ELSS has a shorter three−year lock−in term. Investors now have a larger variety of investment possibilities as a result.

• The management of ELSS is under the direction of qualified fund managers who have the expertise to allocate investments among various equities and equity−related securities in accordance with market conditions and investment objectives.

• Due to the investment's spread across numerous shares and equity−related assets, ELSS provides benefits for diversification. As a result, investing in a particular stock or sector is less risky.

• A liquid investment option with straightforward liquidity is ELSS. Once the lock−in period has ended, investors are free to redeem their assets whenever they want.

• Returns that have exceeded inflation: ELSS has historically provided returns that have done so. Therefore, over time, investors have benefited from the ELSS returns by maintaining their purchasing power.

Taxation and Investment Limits in ELSS

The following are the ELSS taxation and investment limits:

• Taxation − Up to Rs. 1.5 lakhs each fiscal year, ELSS investments are eligible for tax benefits under Section 80C of the Income Tax Act. Investments in ELSS are deducted from taxable income, which lowers the investor's tax obligation. On gains exceeding Rs. 1 lakh in a fiscal year, the returns from ELSS are subject to long−term capital gains tax (LTCG) of 10%.

• Limits on investments: There is no maximum investment amount allowed in ELSS. The tax benefits, however, are capped at Rs. 1.5 lakhs every fiscal year. Additionally, ELSS investments have a three−year lock−in period. The investors are not permitted to withdraw their money during this time.

The fact that ELSS is a market−linked investment and that the returns are not assured is significant. The performance of the underlying equities and equity−related products as well as the state of the market can have an impact on ELSS results. Before making an ELSS investment, investors should think about their investment goals, risk tolerance, and time horizon. Before making an ELSS investment, it is also a good idea to speak with a financial counsellor.

Conclusion

According to Section 80C of the Income Tax Act, ELSS is a mutual fund investment strategy that offers tax benefits. Due to its substantial investment in shares and associated securities, it is a market−linked investment. For ELSS, there is a three−year lock−in period during which investors cannot withdraw their funds. ELSS offers investors a lot of benefits, including the potential for high returns, diversification, and skilled management.

Frequently Asked Questions

Q1. What is the length of the ELSS investment lock−in period?

Ans: Three years are the lock−in period for ELSS investments.

Q2. What are the tax advantages of purchasing ELSS?

Ans: Up to Rs. 1.5 lakhs every fiscal year, ELSS investments are eligible for tax benefits under Section 80C of the Income Tax Act. The amount invested in ELSS is deducted from taxable income, lowering the investor's tax obligation.

Q3. Do ELSS investments involve risk?

Ans: Yes, ELSS investments have a certain level of risk because they are market−linked. The performance of the underlying equities and equity−related products as well as the state of the market can have an impact on ELSS results.