Equity Linked Saving Scheme (ELSS) Tax Saving Benefits

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Are you looking for investment options that offer both growth potential and tax benefits is crucial? Then ELSS or Equity Linked Saving Schemes got you! They provide a compelling proposition of short-term tax savings and the potential for long-term capital appreciation.

This article explores the basics of ELSS, its tax-saving benefits, and how to choose and invest in the right ELSS fund.

What is ELSS?

An ELSS, short for Equity Linked Saving Scheme, is a type of mutual fund that primarily invests in equity and equity-related instruments of various companies. ELSS funds have a mandatory lock-in period of three years designed to provide long-term capital appreciation and tax benefits under Section 80C.

What are the benefits of the ELSS tax saver fund?

In addition to the tax benefit feature, ELSS also comes equipped with other key benefits:

Higher Returns Potential: ELSS funds invest predominantly in equities, which have the potential to deliver higher returns compared to traditional tax-saving instruments like PPF or NSC.
Shortest Lock-in Period: ELSS has a lock-in period of three years, which is shorter than that of other tax-saving options such as PPF (15 years) and NSC (5 years).
Diversification: ELSS funds invest in a diversified portfolio of stocks across various sectors and market capitalizations, reducing risk and volatility.
Professional Management: ELSS funds are managed by professional fund managers who have the expertise to make informed investment decisions, aiming to maximize returns.
Systematic Investment Plan (SIP): Investors can opt for an SIP in ELSS, which allows them to invest a fixed amount regularly. This not only instils financial discipline but also helps in rupee cost averaging.

How to invest in ELSS?

Choose a Reputable Fund House: Select a reliable mutual fund house with a good track record of performance and investor service.

Complete KYC Process: Ensure that your Know Your Customer (KYC) process is completed. This is mandatory for investing in mutual funds.
Select the Investment Mode: Decide whether to invest through a lump sum or via a Systematic Investment Plan (SIP). SIPs are recommended for mitigating market volatility.
Online or Offline Investment: You can invest in ELSS funds either online through the mutual fund house's website, through various online platforms, or offline by visiting the fund house or through a distributor.
Monitor Performance: Regularly review the performance of your ELSS fund to ensure it aligns with your investment goals.

How to choose the right ELSS?

Performance Track Record: Look at the historical performance of the ELSS fund. Consistent performance over 5-10 years indicates reliability.
Expense Ratio: Consider the expense ratio of the fund. A lower expense ratio means higher net returns for the investor.
Fund Manager’s Expertise: Check the experience and track record of the fund manager. A skilled manager can significantly impact the fund’s performance.
Portfolio Composition: Analyze the fund’s portfolio to ensure it is well-diversified across sectors and market capitalizations.
Risk Measures: Assess the fund’s risk metrics like Standard Deviation, Sharpe Ratio, and Beta. These metrics help understand the fund's volatility and risk-adjusted returns.

Endnote

Investing in an Equity Linked Saving Scheme (ELSS) can be a prudent choice for those looking to grow their wealth while enjoying tax benefits. If you are planning to invest in ELSS, you should explore a debit card like the 811 Debit Card by Kotak811 for timely payment, transaction tracking, and special offers as well.

FAQs

1. Is ELSS tax-free on redemption?

No, ELSS is not entirely tax-free upon redemption. Long-term capital gains (LTCG) tax of 10% applies on gains exceeding INR 1 lakh per year.

2. Is it mandatory to withdraw from ELSS after 3 years?

No, it is not mandatory to withdraw ELSS after 3 years. You can stay invested as long as you wish for continued growth.

3. Is ELSS under 80CCG?

No, ELSS falls under Section 80C, not 80CCG. Section 80CCG pertains to the now-discontinued Rajiv Gandhi Equity Savings Scheme (RGESS).

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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

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