Why ELSS is known as a tax saving fund?

As written on 10^th Feb 2021

If saving tax is the only purpose of your investment, there are several tax saving schemes that come under Section 80C of the Indian Income Tax Act, 1961. However, if your goal is to save tax and also earn capital appreciation in the long run, you can consider investing in an ELSS scheme. Equity Linked Saving Scheme (ELSS) is an equity oriented mutual fund scheme that comes with a three year lock-in and tax benefit. ELSS is the only mutual fund scheme that offers tax benefit. You can bring down your gross taxable income by up to Rs. 1,50,000 by investing this sum in an ELSS scheme.#

Here’s an example to help you understand how ELSS works

Ms. R, a data scientist with a private firm earns with a gross taxable income of Rs. 14 lakh. This lands her in the highest tax slab. Rima chooses an ELSS scheme as a tax saving instrument and invests a total amount of Rs. 1.5 lakh in this tax saver fund. According to Section 80C of the Indian Income Tax Act, 1961, R’s gross taxable income has now come down to Rs. 12.5 (14 minus 1.5) lakh and she has now managed to bring down her overall tax liability by investing in the ELSS scheme.

Things to keep in mind before investing in ELSS scheme

Although ELSS scheme has the dual benefit of long term capital appreciation and tax benefit, here are a few factors for investors to consider before investing in this tax saving scheme.

SIP or Lump sum: Investors keen on saving tax and earning long term capital appreciation can consider starting a SIP in an ELSS scheme. If you have surplus capital that is sitting idle, you can make a one time lump sum investment. These are the two ways by which you can invest in ELSS, i.e., either by starting a monthly SIP or making a one time lumpsum investment. A Systematic Investment Plan is an investment vehicle for investors to make small investments at fixed intervals towards their ELSS scheme. With SIP, all an individual has to do is complete all the pre-investment formalities with their bank as well as the fund house and also decide on the monthly SIP amount that they intend to invest for the next three years. After this, every month on a fixed date, a predetermined amount is debited from the investor’s savings account and electronically transferred to the fund. Long term investing in ELSS via SIP is known to offer several other benefits like the power of compounding and rupee cost averaging. If you want to get a rough estimate on the capital appreciation that you might derive out of your ELSS investments, you can use an SIP calculator, a free online tool available to everyone.

Growth or dividend: If your financial goal is to earn long term capital appreciation through ELSS investing, you can opt for the growth option. In the growth option, the capital appreciation earned by the scheme is invested back in the ELSS scheme. By allowing reinvesting, investors can help pave the way for several other benefits like compounding which helps grow your small SIP amounts into a large corpus in the long run. However, if you seek regular income out of your ELSS scheme, you may opt for the dividend option.

Invest in ELSS scheme offered by Axis Mutual Funds

Axis Long Term Equity Fund is an open ended equity linked saving scheme with a statutory lock in of 3 years* and tax benefit. The investment objective of Axis Long Term Equity Fund is to generate income and long-term capital appreciation from a diversified portfolio of predominantly equity and equity-related securities. However, there can be no assurance that the investment objective of the scheme will be achieved.

Benefits of Axis Long Term Equity Fund

• Axis Long Term Equity Fund is a diversified equity linked saving scheme (ELSS) that invests in a mix of large caps and select midcaps
• The fund has a 3-year lock-in which is the lowest among other tax saving instruments
• A 3-year lock-in ensures that the money stays invested in equities and does not get perturbed by market ups and downs
• Being an ELSS scheme, the scheme comes with dual advantage of building wealth and saving tax
• Investors can target long term goals such as children’s education and their future, retirement or any other long term financial plan
• Axis Long Term Equity Fund has a 3-year lock-in which is one of the lowest amongst other tax saving instruments

Retail investors must consult their financial advisor and discuss about ELSS schemes before investing in Axis Long Term Equity Fund.

*ELSS Investments are subject to a 3-year lock-in.

#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.