Equity linked savings scheme (ELSS)

November 8th, 2009  |  Published in Income Tax, Investment  |  1 Comment

Equity linked savings schemes (ELSS) floated by various fund houses, are equity-oriented mutual fund schemes with an added advantage of tax benefits under various sections of the Income Tax Act,1961. Schemes are floated as per the guidelines that qualify them as eligible schemes U/S 80 C of the Income Tax Act.

Like any other equity schemes, the fund manager invests the pool of money into diverse equity stocks and actively manages the whole portfolio. Most of the ELSS schemes declare dividends, which again are tax-free. Redemption of units allotted can be done only after three years from the date of allotment of units.

Objective & Features:
Type of Scheme: Equity Oriented schemes
Asset Allocation:  80 – 100% equities
Scheme objective – Capital appreciation
Liquidity – Lock-in for 3 years

Investment strategy for ELSS
Investment in ELSS can be made as:
a)      Lump sum investment
b)      Systematic Investment Plan(SIP) of as low as Rs 500 can be started

Points to Remember
-         Fund eligible for deduction from taxable income is Rs 1lakh
-         Underlying asset class is equities
-         Amount invested gets locked in for 3 years from the date of allotment of units.
Investments in ELSS can be a lump sum investment or through the systematic investment plan (SIP). Staggering your 80C investments throughout the financial year is a practice that needs to be followed religiously. This way you can smoothen your income flows for the whole year and earn higher returns, as the amount stays invested for longer duration. For the salaried classes, who have a regular monthly income, SIP in ELSS is a smart way to plan 80C investments to reduce the tax deducted at source (TDS) burden. SIP in ELSS started from month of April has additional advantages:

-         No need to time the market
-         Avoid burdening the end of the year income with tax savings investments
-         Benefits of rupee cost averaging

Advantages of ELSS

  • Tax Benefit
    • Investment up to Rs 1lakh is eligible as deduction from taxable income U/S 80C
    • Capital gains on redemption are tax-free U/S 10(38)
    • Dividends are tax-free U/S 10(35) 
  • Advantages over other tax saving instruments

Major advantage of ELSS over other tax-saving instruments like PPF/NSC/ Bank deposits, etc, is shorter lock-in period and the potential higher returns. Amount invested in ELSS gets blocked only for 3 years whereas for other instruments it is 5 years or more. ELSS being an equity based investment has the potential to deliver better returns compared to any other fixed return instrument over an extended time horizon.


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