Taxes, like death, are inevitable. What we are trying to say with this rather morbid comparison is that taxes are unavoidable. If you are in the organised sector earning a regular income, then you are liable to pay taxes.But while you can’t ignore it, you can definitely minimise your tax liability by planning your taxes well. One such way to reduce your tax liability can be found through investments in mutual funds, all thanks to Equity Linked Savings Schemes (ELSS).
What is ELSS?
ELSS is an equity-oriented mutual fund that allows you to reduce your taxable income by up to Rs 1.5 lakh in a financial year. This is as per Section 80C of the Income Tax Act, 1961. Such funds invest in the shares of companies across sectors, themes, and market capitalisations. Much like other equity products, the returns on ELSS are market-linked. Although subject to market fluctuations in the short-run, ELSS has the potential to deliver significant returns in the long run.
ELSS has a lock-in period of three years. This means you cannot withdraw your money before the end of 36 months. You can either make a lumpsum investment or invest in parts through a Systematic Investment Plan (SIP) with an amount as low as Rs 500. However, if you choose the latter, the lock-in period will apply to each SIP instalment.
Taxation of ELSS
There is no upper limit for investing in ELSS. However, there is a tax deduction limit of Rs 1.5 lakh per year, as mentioned earlier. Since your money will remain invested in the fund for more than 12 months, the gains on ELSS will by default be subject to a Long-term Capital Gains(LTCG) tax. As per LTCG, gains in a financial yearbelow Rs 1 lakh will be tax-free while gains above Rs 1 lakh will be taxed at 10%. For instance, if your total capital gains in a financial year are Rs 1,10,000, then you will have to pay 10% tax on Rs 10,000 (the amount above Rs 1 lakh), bringing your LTCG tax for that year to Rs 1000.
Early tax planning with ELSS
When it comes to tax planning, it helps to be the early bird. Starting early, at the beginning of the financial year, has several benefits. You get enough time to align your tax-saving goals with other financial goals since ELSS may help you build wealthin addition to saving tax. You also get the flexibility to invest as per your convenience in small amounts through SIPs, so that you don’t feel the pinch. For example, you can start a monthly SIP of Rs 12,500 right from April. An incidental advantage of this is that you invest during different market cycles throughout the year. The fund manager buys more units when the price is low and fewer units when the price is high. This helps you average out the cost of investment andtackle the volatility associated with equities. Investing in ELSS through SIPs since the beginning of the year also helps you become financially disciplined since you save and invest a fixed sum at regular intervals.
Please note that the lock-in of three years is applicable to each single SIP. This means that an SIP payment made in May 2021 will be locked in till May 2024.
There are different mutual funds to suit different needs. ELSS is a type of mutual fund that helps you save tax and increase your take-home income. Apart from the tax benefit, ELSS may also help you create wealth for your long-term financial goals. Moreover, it gives you the flexibility to spread your investments across the year and also provides an opportunity to inculcate financial discipline in life.
Smriti Jain is the owner and senior content publisher at Financesmarti. Financesmarti is a website where she shares a lot of useful stuff for the people and business of India. This includes small business ideas and other banking information, as well. Smriti completed her education in science & technology from Delhi University. Smriti usually has interests in digital marketing now, and she has chosen this career for the full-time opportunity. The primary purpose of starting this blog to provide quality information on the banking industry to the people.