How to Invest in ELSS Mutual Fund Schemes to Save Tax
Investing in ELSS (Equity-Linked Savings Schemes) mutual funds is a popular strategy for tax savings. These funds are similar to other mutual funds in terms of their investment approach, but they come with a unique 3-year lock-in period, which makes them ideal for individuals looking to reduce their taxable income. In this article, we will guide you through the process of investing in ELSS funds to save tax.
Understanding ELSS Mutual Funds and Their Benefits
ELSS mutual funds are a type of hybrid fund that primarily invests in equities, thus offering the potential for long-term capital appreciation. The primary advantage of investing in ELSS funds is the tax benefit, which comes under Section 80C of the Indian Income Tax Act. Specifically, the amount invested in these schemes can be set off against your taxable income up to a limit of ?1.5 lakh per financial year.
Steps to Invest in ELSS Mutual Funds
1. Assess Your Risk Appetite
The first step in investing in ELSS mutual funds is understanding your risk tolerance. ELSS funds, being equity-oriented, have the potential for higher returns but also involve higher risk compared to debt or hybrid funds. Choose a fund based on your risk profile, whether you are a conservative, balanced, or aggressive investor.
2. Open a Demat and Bank Account
To invest in ELSS mutual funds, you will need a Demat account, which is a depository of securities. Most banks offer Demat accounts, so you can open one at a nearby branch. Additionally, you need a bank account to complete the transaction.
3. Select the Right ELSS Fund
Once you have your accounts in place, the next step is to select an ELSS fund. Based on your risk appetite, you can choose from a variety of ELSS options. For instance, if you are a conservative investor, you might opt for a fund with a balanced approach. If you are more aggressive, you can explore funds that focus more heavily on equities.
4. Choose Between Lump Sum and SIP
You can invest in ELSS through a lump sum or a Systematic Investment Plan (SIP). If you prefer the lump sum method, you must complete the 3-year lock-in period. On the other hand, if you choose the SIP route, each instalment must also complete its respective 3-year lock-in period.
Lump Sum Investment: If you opt for a lump sum investment, you will have to commit to a 3-year lock-in period. This means that you cannot redeem your investments before 3 years from the date of investment. However, the advantage is that your investment can potentially benefit from the long-term growth of equity markets.
Systematic Investment Plan (SIP): For those who prefer a more flexible approach, the SIP method is a viable option. Here, you can invest a fixed amount at regular intervals. Each installment must also complete its 3-year lock-in period to avail of the tax benefits. SIPs are particularly useful for those who want to invest a smaller amount at regular intervals or prefer a regular habit of saving.
Frequently Asked Questions (FAQs)
1. Does ELSS mutual fund have a lock-in period?
Yes, ELSS mutual funds have a mandatory lock-in period of 3 years, which means that you cannot redeem your investment before this period. This ensures that the government can offer tax benefits based on the risk taken by the investor.
2. Are there any tax advantages of investing in ELSS mutual funds?
Yes, investments up to ?1.5 lakh per financial year in ELSS schemes are eligible for tax relief under Section 80C of the Income Tax Act, 1961. This can help reduce your taxable income thereby reducing tax liabilities.
3. Can I invest in ELSS with a shorter lock-in period than 3 years?
No, the minimum lock-in period for ELSS mutual funds is 3 years. Any attempt to redeem your investment before 3 years would result in a penalty or a compulsory capital gain tax.
Conclusion
Investing in ELSS mutual funds is an efficient way to save tax while also seeking the potential for higher returns in the long term. By understanding your risk tolerance, selecting the right fund, and choosing between lump sum or SIP investments, you can optimize your tax savings efforts. Remember, it's always a good idea to consult with a financial advisor or a tax expert before undertaking any significant investment decisions.