What is Elss And It's Benefits? |Updated

   Tax Benefits

     Under Section 80C of the Indian Income Tax Act, you can claim tax benefits on certain expenditures and investments. ELSS mutual funds and tax-saving FDs are two of the various investment options covered under Section 80C provisions that provide tax deductions of up to Rs.1.5 lakh a year. Each of these options comes with their set of goals, risks, and returns

First time investors:

    If you are a new investor, ELSS is an ideal choice, since in addition to tax benefits you get a flavour of equity investing and mutual funds. Yes, equity investments do carry a higher risk, but that is generally over the short term. If you invest for more than five years, the risk is much lower. Like all equity investments, the best way is to start investing in monthly SIPs through the year. SIP in a ELSS fund helps you to accumulate more units when the market is in red and generate exceptional returns when the markets are favourable.

Things To Consider Before Investing in ELSS Funds

Fund returns:

    Before you go for a fund, compare the fund performance with its competitors & benchmark to know if it has shown consistent performance in the past. If a fund outperforms its benchmark or competitors, then the fund delivers high returns.

History of fund house:

     It is recommended to choose fund houses that have performed consistently over a long period, say about five to 10 years.

Expense ratio:

  The expense ratio depicts how much of your investment goes towards managing the fund. If a fund has a lower expense ratio, it means you can have higher take-home returns - so it's always better to go for such funds.

Financial parameters:

 You can also consider several parameters such as Standard Deviation, Sharpe Ratio, Alpha and Beta to analyse the performance of a fund. A fund with a higher standard deviation and beta is more risky than one with a lower deviation and beta. Choose funds with a higher Sharpe ratio.

Fund manager:

   The fund manager is another factor to consider, because he / she is the person who plays a key role in management of your funds. The fund manager must be competent and must have great experience in picking the right stocks and creating a strong portfolio.

Advantages of ELSS Mutual Funds

Here's a look at the advantages of ELSS Mutual Funds:

Shortest lock-in:

      ELSS has the shortest lock-in period of three years. Tax-saving fixed deposits have a five-year lock-in, while PPF has a 15-year maturity. All in all, ELSS offers more liquidity in the medium term.

Potentially higher returns:

      Unlike ELSS where return is market linked, other 80C investments like PPF or FDs are fixed income products. ELSS has the potential to generate significantly higher wealth in a medium to long-term investment horizon.

Better post-tax returns:

     Long Term Capital Gains from ELSS are tax free up to limit of ₹1 lac. Gains over 1 lac attracts a tax rate of just 10%. Lower tax rates, coupled with higher returns ensure the best post tax returns.

Regular investing is hassle-free and convenient:

 It is easy to invest in ELSS funds through a monthly SIP.

Tax Implications on ELSS

     Capital gains from ELSS get the same treatment in Income Tax Calculation as rest of the Equity Instruments. Short term capital gains (STCG) attract a tax of 15%, while Long Term Capital gains (LTCG) are only taxable if the gains exceed ₹1 lac during the financial year. LTCG attract a tax of 10% on the amount exceeding ₹1 lac.

Options for Investing in the Best ELSS Funds

There are three types of ELSS mutual funds that an investor can choose from,

1. Growth Option

Under the growth option, the investor gets the gains only at the time of redemptions. Appreciation in the total NAV of the ELSS mutual fund multiplies the profits. Investors are not entitled to benefits in the form of dividends. Mutual fund returns are subject to market risks, and so are the returns from ELSS funds.

2. Dividend Option

Under the dividend option, the investor is entitled to get timely dividends. Dividends are declared only when there are excessive profits. According to the budget 2020, the dividends are taxed in the hands of the investors. The investors are supposed to pay the tax on dividends based on their income tax slab.

3. Dividend Reinvestment Option

Under this option, the investor can choose to reinvest dividends received into the same scheme. This option is favorable when the markets are doing well and are likely to continue in the same way.

Upon choosing the type of ELSS fund, the investor can invest either through a lump sum amount or SIPs. ELSS mutual funds are suitable for small investors as well, who wish to invest small and regular amounts to save tax. However, if an investor has a lump sum amount, they can also invest the entire amount in the top ELSS funds.