Clarify These Commonly-Held Misconceptions About ELSS

Equity Linked Saving Scheme, abbreviated as ELSS is a tax saver fund that also offers long term capital appreciation. ELSS comes with a three year lock-in period which means that one cannot redeem their ELSS units or withdraw from the scheme for a minimum period of 36 months. As per Section 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1.5 lakhs per fiscal year in an ELSS scheme and claim tax deduction for the same. ELSS is the only mutual fund scheme that comes with a tax saving benefit. The investment objective of an ELSS fund is to generate capital appreciation over the long term and also offer a tax benefit.

Here is an example to help you understand how investments in ELSS can help you save tax:

Ramesh is a senior software engineer with a gross salary of Rs. 12 lakhs. This lands Ramesh in the 30 percent tax slab. Ramesh finds about ELSS from a colleague and invests Rs. 1.5 lakhs in this tax saver fund. Now, Ramesh’s taxable income has come down to Rs. 10.5 lakhs and he was able to bring down his tax liability by investing in a tax saving schemes like ELSS.

Although investing in ELSS has several advantages there are still some misconceptions surrounding the tax saver fund which needs to be cleared right away. Here are some common misconceptions about ELSS that are debunked:

ELSS investments should not exceed three years

Now remember that ELSS comes with a three year lock in. But that doesn’t mean that investors should redeem their ELSS units after 36 months. ELSS is an equity oriented scheme. Historically equity related schemes have performed far better over the long term. So if the ELSS fund you invested in is performing well, investors can remain invested in the scheme even after the three year lock-in. Whether they want to continue investing or not is entirely up to them. But if the fund is good at income generation, they can remain invested and reap the benefits.

You should invest in only one ELSS

Although the primary objective of all ELSS offered by all AMCs is to generate capital gains and offer tax benefit, this doesn’t mean that investors should only invest in one ELSS fund. If you are investing Rs. 1.5 lakh in ELSS every financial year, you can invest Rs. 75,000 in two different funds instead of investing the entire amount in just one ELSS fund. This way you can compare the performance of both the funds and invest more in a better performing fund.

You need to invest only Rs. 1.5 lakhs in ELSS

This is absolutely not true. Investors can invest an amount they are comfortable with depending on their risk appetite. There is no upper limit for investing in ELSS. One can invest depending in their financial goals. The only thing is that they cannot claim tax deductions for investments more than Rs. 1.5 lakhs per fiscal year.

One should make a lumpsum investment in ELSS

If you make a lump sum investment in ELSS, you will be exposing your entire investment amount to the market’s volatile nature. Instead, you can opt for a Systematic Investment Plan. SIP allows investors to invest small fixed amounts at regular intervals. SIP investments can also inculcate the discipline of regular investing. Investors can also refer to an online SIP calculator to get a rough estimate of their wealth through systematic investments.

Now that some of the myths surrounding ELSS are exposed, plan on investing in this tax saver fund? Investors are expected to determine before making an investment in ELSS. They should also bear in mind that investments made in ELSS do not guarantee any returns.