ELSS: What is it, why is it important, and how does it help lower liabilities

ELSS (equity-linked savings scheme) is a type of mutual fund that invests majorly in equities and equity-linked instruments. This financial option has a mandatory lock-in of three years, and during this period, you cannot liquidate your units in the ELSS app. What makes ELSS different from other financial instruments is its qualification for tax deduction under Section 80 C with relatively short lock-in period. This makes it an enticing option for you, especially if you are tax conscious.

Significance of ELSS –

Tax benefits

ELSS provides you with the dual benefit of wealth creation through equity investments while allowing you to save taxes of up to Rs. 1.50 lakh per annum under Section 80 C. This tax benefit makes ELSSs an indispensable constituent of tax planning for the salaried class.

Long-term wealth creation

ELSS funds invest majorly in equities, and based on historical record, they can potentially outperform other instruments over the long term. By remaining invested for a longer period, you can capitalize on the compounding effect and potentially create considerable wealth to achieve your life’s goals.

Diversification

An ELSS diversifies your investment across distinct stocks and sectors, thereby lowering the overall risk linked with investing in equities. For this reason, even if a few sectors underperform, their impact on the overall investment portfolio is minimized.

SIP route

ELSSs offer the flexibility of systematic investment plans (SIPs). With an SIP, you can periodically, say monthly, invest a small amount in a preferred ELSS scheme, which encourages disciplined investing and eliminates the need to gather a large sum of money required for a lumpsum investment.

How does ELSS help lower liabilities?

Lock-in period

As mentioned above, ELSS funds have a mandatory lock-in period, which is a considerable factor from the perspective of reducing liabilities. When you commit to holding your investments for at least three years, you are discouraged from making any hasty decisions during market movements. This reduces the chances of incurring losses owing to premature liquidity, which can be hamper the attainment of long-term goals. The lock-in period serves as a tool for financial discipline, allowing you to remain invested and ride out of short-term market volatility. This often leads to higher returns over the long term.

Wealth preservation

The equity-linked approach adopted by ELSS funds plays an essential role in preserving the buying power of your wealth over time. Historically, equities have outperformed other asset classes over the long term, and they can potentially deliver inflation-beating returns. Because inflation corrodes the value of money, ELSSs serve as a perfect hedge against it. By investing in a well-researched basket of equities, ELSSs aim to preserve the value of your money, thus ensuring financial stability and security in the future.

Offsetting taxable income

One of the basic motivations to invest in an ELSS is the associated tax benefit. Under Section 80 C, you can get a tax deduction of up to Rs. 1.50 lakh on your taxable income in a financial year by investing in ELSS. This helps reduce your taxable income. For instance, if your overall taxable income in a financial year is Rs. 7 lakh and you invest Rs. 1.50 lakh in a preferred ELSS scheme, your taxable income decreases to Rs. 5.50 lakh. Calculate your ELSS tax savings with our ELSS calculator.

Flexibility in investing

ELSSs offer high investment flexibility, allowing you to select between the lumpsum and SIP modes. An SIP allows you to contribute periodically, even with a small investible amount, rather than investing a large sum of money at once, as in the lump sum mode. This promotes financial discipline because you can allocate a fixed investible constituent every month toward an ELSS through an SIP. SIPs even mitigate the risk of investing a considerable amount at unsuitable market levels because they disperse investments across distinct market cycles. Alternatively, if you have surplus funds, you can consider the lump sum route. This flexibility to choose the investment mode helps you align your ELSS with your financial preferences and potential, thus lowering the risk of facing liquidity constraints.

Conclusion

ELSS is a prudent financial option to lower your liabilities effectively. The mandatory three-year lock-in period promotes financial discipline and prevents impulsive decision-making during periods of market volatility, thereby allowing you to potentially generate suitable returns. By aiming to generate wealth over the long term, ELSSs help preserve the value of your money and serve as a perfect hedge against inflation.

The tax-deduction provision under Section 80 C allows you to claim a deduction of up to Rs. 1.50 lakh from your taxable income, thus lowering your tax liabilities. Moreover, the flexibility available for investing in ELSSs allows you to customize your approach depending on your financial goals and capabilities.

Given the benefits of ELSSs, you would do well to consider adding them to your investment portfolio. By doing so, you may not just save on taxes but also capitalize on the growth potential of equities.

Source: Axismf Research

Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.

ELSS Investments are subject to a 3-year lock in period and are eligible for Tax Benefit under section 80c of Income Tax Act, 1961.

“As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab.

Finance Act, 2020 has announced a new tax regime giving taxpayers an option to pay taxes at a concessional rate (new slab rates) from FY 2020-21 onwards. Any individual/ HUF opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions. Since, individuals/ HUF opting for the new tax regime are not eligible for Chapter VI-A deductions, the investment in ELSS Funds cannot be claimed as deduction from the total income.

Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS”

Statutory Disclaimer: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Past performance may or may not be sustained in future.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.