Definition
ELSS, or Equity Linked Savings Scheme, is a type of diversified equity mutual fund in India that qualifies for tax exemption under section 80C of the Income Tax Act. It involves investing a majority of the fund in equity and related products. The main feature of ELSS is its lock-in period of three years, during which the fund cannot be redeemed.
Key Takeaways
- ELSS, or Equity Linked Saving Scheme, is a type of diversified equity mutual fund in India which not only offers tax savings under section 80C of Income Tax Act, but also potential for good returns as the investment is predominantly in equity stocks.
- There is a lock-in period of three years in ELSS, which is lower compared to other tax saving instruments. This means that you must hold the ELSS investment for a minimum of three years.
- Investments in ELSS funds can be made using both Lump sum and SIP (Systematic Investment Plan) methods. SIP is recommended for investors who do not have a large chunk of money to invest at once and it also aids in averaging out the cost of purchase over time.
Importance
ELSS, or Equity Linked Savings Scheme, is an important term in finance primarily because it serves as a tax-saving mutual fund that offers individuals a way to generate higher returns while saving on taxes.
This form of mutual fund platform invests a major portion of your capital in equity or equity-related avenues.
This provides an opportunity for capital appreciation, potentially offering higher returns compared to other traditional tax-saving instruments.
Furthermore, ELSS investments come with a statutory lock-in period of three years, which is substantially less compared to other popular tax-saving avenues.
The dual benefits of tax saving under Section 80C of the Income Tax Act and the potential for high returns make ELSS an indispensable term in the arena of finance.
Explanation
Equity Linked Saving Scheme (ELSS) is primarily used as an investment tool that can lead to substantial wealth accumulation and tax savings. This type of mutual fund investment is especially popular in India where it is prevalent among individuals seeking an investment avenue that offers capital appreciation along with tax benefits.
The dual advantage of potentially strong returns due to equity exposure and significant tax benefits under Section 80C of the Indian Income Tax Act makes ELSS a unique and attractive option for investors. The key purpose of ELSS is not just to offer an investment avenue, but also to encourage long-term investment habits among individuals.
This is enforced through a compulsory lock-in period of three years, meaning the investor cannot withdraw funds before this period ends. The lock-in period also serves as a buffer against short-term market fluctuations, giving the investment the potential to recover from temporary market downturns.
By combining tax savings with the prospects for high growth, ELSS enables investors to meet their long-term financial goals while effectively managing their tax liabilities.
Examples of ELSS
ELSS, or Equity Linked Savings Scheme, is a popular investment tool in India that combines tax savings with wealth creation potential. Here are three real world examples:
HDFC Taxsaver ELSS fund: HDFC Taxsaver is an open-ended ELSS savings scheme that invests primarily in equity and equity related instruments. The main purpose of this scheme is to generate long-term capital appreciation and allow investors to avail tax deduction from total income, as permitted under the Income Tax Act in India.
Axis Long Term Equity Fund: This is another highly regarded ELSS fund in India. It aims to generate regular long-term capital growth from a diversified portfolio of equity and equity related instruments. It lets investors save tax under Section 80C of the Income Tax Act.
ICICI Prudential Long Term Equity Fund (Tax Saving): This is an ELSS mutual fund that primarily invests in equity and equity-related securities with a long-term perspective. It allows for tax benefits, growing the invested capital over time, and also provides diversification benefits. All of these function under the terms of India’s tax law, wherein investments up to
5 lakh INR are exempted from income tax under Section 80C.
FAQs about ELSS
What is an ELSS?
ELSS stands for Equity Linked Savings Scheme. It is a type of diversified equity mutual fund which is qualified for tax exemption under section 80C of the Income Tax Act, and offers the twin advantage of capital appreciation and tax benefits.
How does ELSS work?
An ELSS fund invests a majority of its assets in equity and equity-related instruments with a long-term investment horizon. The returns from an ELSS fund depend on the market performance of its underlying equity investments.
What is the lock-in period for ELSS?
The lock-in period for an ELSS fund is 3 years. This means that you cannot redeem your investment before the completion of 3 years from the date of investment.
Are ELSS returns tax free?
The long term capital gains from ELSS funds up to INR 1 lakh are exempted from tax. However, gains exceeding INR 1 lakh are taxed at 10%.
Can I invest in ELSS after exhausting 80C limit?
Yes, you can invest in ELSS even after exhausting your 80C limit. However, you will not receive any further tax benefits for the amount invested beyond the 80C limit.
Related Entrepreneurship Terms
- Equity Funds: These are funds that primarily invest in shares of companies. ELSS operates largely like equity funds, investing mainly in equities.
- Mutual Funds: ELSS is a type of mutual fund where funds are gathered from multiple investors to serve a common investment goal.
- Tax Deduction: ELSS allows investors to get income tax benefit under Section 80C of the Income Tax Act, 1961 in India.
- Lock-in Period: ELSS without a doubt comes with a particular lock-in period. Investors need to remain invested for a specified period of time typically 3 years.”
- Long-Term Capital Gain (LTCG): This refers to the profit earned by selling ELSS units after the lock-in period. As per the current tax laws, if the profit exceeds Rs.1 lakh a year, it would be subject to taxation.
Sources for More Information
- Investopedia: This site provides broad investment and financial information including terms like ELSS.
- Moneycontrol: A comprehensive site providing information on finance, including various financial products like ELSS.
- Economic Times: This site offers wide range of financial news and definitions including explanations of ELSS.
- Financial Express: A finance oriented news site that provides detailed explanations and news about various financial subjects like ELSS.
