Understand How ELSS Returns Are Taxed

Mutual fundschemes are one of the most common investment avenues in India. They are investment schemes in which the AMC collects i.e., pools money from a group of investors. After enough money is collected in the fund, it is used to invest in financial securities such as money market instruments, bonds, stocks, and gold. Simply put, mutual fundsfunction as a trust that collects money from a group of like-minded investors.AMCs i.e., asset management companies are known for operating and managing many mutual fund schemes and each of these schemes is known for having a specific investment objective that caters to distinct investment needs.

Depending on the fund’s objective, the money collected from the group of investors is placed in various financial securities. A finance professional who is referred to as a fund manager takes care of managing the mutual fund portfolio. Their main goal is to earn optimum returns on the fund’s investments. The income generated by the investments is then divided and distributed among the investors proportionately.

However, you need to remember one important aspect to remember about mutual fund schemes. The said aspect is, that there are numerous types of mutual funds that are available as investment options. One of those different variants is equity-linked savings schemes or ELSS.

What are equity-linked savings schemes?

This variant of mutual funds allocates funds to financial securities such as equities and other equity-related instruments. While ELSS is primarily known amongst investors for its tax-saving facilities, they also have the potential to help you with goalssuch as long-term wealth accumulation and beating inflation. Known for having a lock-in period of three years, these tax-saving schemes are one of the types of equity mutual funds. The tax benefits offered by these schemes can be enjoyed under Section 80C of The Indian Income Tax Act, 1961. Just like it’s the case for any other type of mutual fund, you can opt to invest in ELSS through the SIP mode, in which you can make the choice of investing at regular intervals instead of making a one-time lump-sum investment.

How do they work?

With the help of equity-linked savings schemes, you get a chance to claim a tax rebate of approximately ₹1,50,000 and as a result, save up to ₹46,800 annually. The investments in ELSS are mostly geared towards equity-linked securities and equities. Therefore, in case you have allocated funds to ELSS, it is possible for you to allocate funds tosecurities like listed shares. Other than listed shares, a small, limited exposure to fixed-income securities can be involved as well. However, before going ahead and opting for the scheme, please remember that these funds come with a lock-in period of just three years.Supposedly, three yearsis the shortest among all Section 80C investments.

Are there any benefits associated with ELSS?

Listed below are some of the merits that are associated with equity-linked savings schemes:

There are tax benefits associated with ELSS:

Amongst theprimary reasons why people opt for ELSS is that it allows investors to enjoy tax deductions. They get to enjoy tax deductions because of the provisions of the Indian Income Tax Act, 1961 (Section 80C). Thus, if you as were to sign up for ELSS, you may get to enjoy a tax deduction of approximately ₹1,50,000 a year.

Inflation may not affect the income generated:

Other than saving taxes, the other major feature of ELSS is that they have the potential of offering inflation-beating revenue. Therefore, if you opted for an ELSS plan for 40 years supposedly after four decades the market is experiencing inflation, there is no need to worry.That’s because the income generated through the scheme may not be impacted by the conditions of the market.

Theseschemes are helpful in acquiring wealth for the long-term:

As it is stated earlier, ELSS is an equity-related mutual fund scheme that has a lock-in of three years. But, instead of withdrawing after the end of the lock-in period, you can make the choice to keep the funds invested. Through this choice, you can achieve your financial goal, which will be to have enough balance at your disposal at the time of retirement.

How the ELSS returns are taxed?

If you were to redeem your ELSS investment after the 3-year lock-in period, you are required to pay a long-term capital gains (LTCG) tax. The profit generatedthrough the sale of investments in an equity-oriented mutual fund scheme which is held for over 1 year is considered a long-term capital gain. The LTCG on equity-oriented funds or equity shares for gains that exceed₹1 lakh in a given financial year is taxed at 10%. You should also include 4% Health & education cess without the benefit of indexation.

Despite the tax benefits offered by ELSS, investors are allured to these tax-saving investments for other reasons as well. In case you are seeking a mutual fund scheme that offers greater flexibility, ELSS funds can be considered a one-stop solution.