Explain How To Save Tax With ELSS

Investing in a tax saving scheme is a must for every individual that falls in either of the tax brackets. Failing to file income tax returns can lead to a fine which may vary depending on the individual’s tax slab. No one likes to pay tax as you end up giving a portion of your hard earned money to the government. However, if you invest in the right type of investment scheme, not only can you file for tax returns, but you can also bring down your overall tax liability and also give yourself an opportunity to earn some decent returns in the long run.

You can save tax this fiscal year by investing your hard earned money with Equity Linked Savings Scheme, a mutual fund scheme that comes with a tax benefit.

Also referred to as ELSS, an Equity Linked Savings Scheme is an open ended equity mutual fund scheme that comes with a statutory three year lock-in and tax benefit. As per SEBI guidelines, all ELSS schemes must invest the maximum of their investible corpus in equity and equity related instruments of publicly listed companies.

The nature of an equity mutual fund scheme is to take calculated risks and outperform its underlying benchmark by generating long term capital appreciation. An ELSS fund possesses all the qualities of an equity fund with the added tax benefit. Any individual can invest up to Rs 1,50,000 every fiscal year in the ELSS scheme and obtain tax exemption from their gross annual income.

To begin with, ELSS has a short lock-in period as opposed to other tax saving instruments under Section 80C of the Indian Income Tax Act, 1961 that have the money locked-in for anywhere between five years to fifteen years depending on the type of instrument you choose. ELSS has a short lock-in period of three years post which investors can either redeem their investments or continue to remain invested.

ELSS is an actively managed mutual fund scheme. Every ELSS scheme has a fund manager or a team of qualified fund managers who are constantly endeavoring to make the right investment decisions and maintain a portfolio that comprises credible stocks with growth potential. So, when you invest in an ELSS scheme, you are saving tax and at the same time investing in a scheme that is professionally managed by fund managers. As per Section 80C of the Indian Income Tax Act, 1961 Indian taxpayers can invest up to Rs. 1.5 Lacs in ELSS every financial year to reduce their tax liability. However, this does not mean that one should only restrict their yearly investments in ELSS to the said figure. Do remember that ELSS is an equity fund and one can consider investing a sum greater than Rs. 1.5 Lacs if it suits their financial goals as well as their risk appetite and investment time horizon. There are no upper limits on ELSS investments, and one can invest any sum as long as it is not lesser than the minimum investment sum mentioned in the ELSS fund’s Scheme Information Document (SID).

Rahul Saxena is a businessman with an annual income of Rs. 15 lakhs. This puts him in the highest tax slab. Rahul learns about ELSS and decides to invest Rs. 1.5 lakhs in it. According to Section 80C of the Indian Income Tax Act, 1961 investments of up to Rs. 1.5 lakhs made in an ELSS scheme are eligible for tax benefits. So, by investing Rs. 1.5 lakhs in ELSS Rahul managed to bring down his gross taxable income to Rs. 13.5 lakhs. Also, since ELSS is an equity mutual fund scheme, the 3 year lock in period might help Rahul accrue some interest on the investment amount.