Important aspects of Equity Linked Saving Schemes

1. Important aspects of Equity Linked SavingSchemes • When it comes to mutual fund schemes, there are different types of schemes with different risk profiles and portfolios. This allows you to invest as per your risk appetite and investment preference. One such mutual fund scheme, which is quite popular among investors, is Equity Linked Saving Scheme (ELSS). ELSS schemesare tax saving mutual fund schemes which allow you to save tax on the amount that you invest. Before you choose an ELSS scheme for investment, here are some important aspects that you should know– • 3-yearlock-in • An Equity Linked Saving Scheme is the only mutual fund scheme which has a mandatory lock-in period of 3 years. While other mutual fund schemes allow you to switch or withdrawn anytime, in ELSS you would have to remain invested for a minimum period of 3 years (from investment date) before any switching or redemption is allowed. If you invest in a lump sum, the lock-in period would end after 3 years of investing. In the case of SIPs, each SIP installment would have a lock-in period of 3years. • Type ofscheme • As the name suggests, the ELSS mutual fund scheme is an equity-linked saving scheme. A minimum of 65% of the scheme’s portfolio is invested in equity or equity-oriented instruments. As such, the risk is high and so is the return. Moreover, there are both dividend and growth-oriented ELSS schemes. While growth-oriented schemes reinvest the returns in the portfolio, under dividend ELSS schemes, dividends are paid at regular intervals. This dividend payment can be done even during the lock-inperiod. • Taxability • As mentioned earlier, the ELSS scheme allows tax benefits. The money that you invest in the scheme is allowed as a deduction from your taxable income. You can claim a maximum deduction of INR 1.5 lakhs under the provisions of Section 80C. The returns from the scheme are considered to be long term capital gains. Tax benefit on such gains is allowed if your returns are up to INR 1 lakh. Returns up to INR 1 lakh is allowed as a tax-free income. However, if the returns exceed INR 1 lakh, the excess return would be taxed@10%. • Let’s understand this with an example– • Suppose you invest INR 1.5 lakhs in an Equity Linked Saving Scheme on 1st January 2020. This investment would be allowed as a deduction under Section 80C. You would be able to redeem your investment on 1st January 2023. If, on redemption, the fund value is INR 2.5 lakhs, you have made a long term capital gain of INR 1 lakh. Since this gain is up to the exemption limit, no tax would be payable on the return that you have earned. However, if the fund value would have been INR 2.6 lakhs, your gains would have amounted to INR 1.10 lakhs. In this case, a 10% tax would have to be paid on INR10,000. • Mode ofinvestment

2. You can invest in an ELSS scheme either in one lump sum or in installments through SIPs (Systematic Investment Plans). Moreover, there is no maximum limit on the amount that you can invest in an Equity Linked Saving Scheme. You can invest any amount that you want but tax benefit would be limited to INR 1.5 lakhs. Any excess amount of investment would form a part of your taxableincome. • Compare andbuy • Almost all mutual fund houses offer an ELSS scheme for investors. As such, you can find a range of ELSS mutual fund schemes for your investment. Before investing in any scheme, compare the scheme against other ELSS funds. Choose a fund based on its consistency and returns over a 3-year and 5-year period. The scheme which has given consistent returns over a 3 or 5 year period would be a better bet. So, always compare the available schemes and theninvest. • An Equity Linked Saving Scheme can help you in saving taxes while at the same time maximizing your wealth. So, understand the above-mentioned aspects of the scheme before investing and enjoy the benefits offered by ELSSschemes.