What are ELSS Funds & How Much to Invest in ELSS Mutual Funds?

What are ELSS Funds? How Much Should I Invest In ELSS Funds?

(As on date 04^th June, 2020)

Tax planning should be a part of every individual’s financial planning. These two go hand in hand without a doubt. Why should you pay taxes to the government when you can invest your hard earned money in tax saving schemes and seek tax exemption? If you are new to investing and do not know how to calculate taxes then, you can use an online tax calculator which may prove to be of some help. Also, it is better to invest in tax saving schemes at the beginning of the fiscal year. Why wait till the last minute when you can give your tax investments a systematic investment approach? Also, investing at the last moment to save taxes may require you to make a lumpsum investment, an amount which you may or may not have at the time.

There are several tax saving schemes that offer tax benefits. If you are an investor with zero risk appetite, you may opt for conservative tax saving instruments. However, if you are looking for a tax saver fund that may offer you long term capital appreciation and tax benefit at the same time, you may consider investing in ELSS.

If you wish to find out more about ELSS and how much one should invest to save taxes, continue reading.

What is an ELSS fund?

Equity Linked Saving Scheme or ELSS is a tax saving scheme that comes with a tax benefit. ELSS an open ended scheme that comes with a three year lock-in period. This means you cannot withdraw or redeem your ELSS units for a period of three years. If you withdraw your scheme prematurely, you may have to pay a redemption fee. ELSS is the only mutual fund scheme that comes with a tax benefit. According to Section 80C of the Indian Income Tax Act, 1961 investments of up to Rs. 1,50,000* per fiscal year are eligible for tax deductions.

Here are some of the benefits of investing in an ELSS fund:

ELSS may be considered for long term investment

: Equity related schemes like ELSS may help investors in meeting long term financial goals like retirement corpus or planning your child’s future. That’s because investments made in the equity markets are prone to market volatility which is why if invested one should not fiddle with them and keep a long term investment horizon. Also when you invest for the long run you may not have to worry about the daily market fluctuations and might be able to beat inflation as well.

ELSS comes with a compulsory three year lock-in

: ELSS has a mandatory lock-in period of three years. A lock-in means one cannot redeem their ELSS fund units for a minimum period of three years. But a three year lock in also gives the investments a chance to grow which is necessary for equity oriented schemes.

ELSS has a tax benefit

: A lot of tax payers consider investing Axis' ELSS Fund because it comes with a tax-saving benefit. If you want, you can invest up to Rs. 1.5 lakhs per fiscal year in an ELSS scheme and bring down your gross taxable income. As per Section 80C of the Indian Income Tax Act, 1961, investments made in tax saving instruments like ELSS are eligible for a tax deduction.

ELSS has no upper limit

: A lot of people are unaware about the fact that ELSS has no upper limit. This means you may invest as much as you or as much as your risk appetite allows you. However, you cannot claim for tax benefits exceeding Rs. 1.5 lakhs.

ELSS allows SIP investment

: If you want to invest in ELSS funds for the long run, you may consider investing in them through SIP. Systematic Investment Plan is an easy and hassle free electronic approach which allows taxpayers to invest from the comfort of their laptop or even smartphones. All you have to do is instruct your bank and every month on a fixed date, a predetermined amount is deducted from your savings account and debited to your ELSS fund. SIP investments may also bring in the advantage of compounding and rupee cost averaging.

How much should I invest in ELSS funds?

Here is an example of how ELSS works:

Suppose you are earning taxable income around Rs. 12.5 lakhs per annum, that makes you fall under the 30 percent tax bracket. So if you invest up to Rs. 1.5 lakhs per fiscal year in an ELSS fund you can bring down your gross taxable income to Rs. 11 lakhs and hence reduce your tax liability.

If you are someone new to investing and do not understand how ELSS works or how much you need to invest to save taxes, you can use an online ELSS calculator which might come in handy.

*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

Axis Long Term Equity Fund

An open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit

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