If you're seeking a tax-saving tool with the shortest lock-in period, you might want to explore equity-linked savings scheme (ELSS) mutual funds. By opting investing in an ELSS, you become eligible for a tax deduction of up to Rs 1.5 lakh from your gross total income under section 80C of the Income-tax Act, 1961.
Do mind the risk though. ELSS, being equity-oriented mutual fund schemes, entail higher risk and volatility when compared to tax-saving fixed deposits. It's important to note that unlike tax-saving FDs, where returns are predetermined at the time of investment, ELSS returns are contingent on market performance.
Click here for FY 2023-24 tax-saving guide
Starting from the fiscal year 2020-21, individuals have the option to choose between the old tax regime and a new tax regime. In the old tax regime, individuals can continue to benefit from existing tax exemptions and deductions. Conversely, the new tax regime provides a lower, concessional tax structure without any exemptions or deductions. Under the new tax regime, one forgoes tax breaks such as those provided by Section 80C, Section 80D, Section 80TTA, and others. It's important to note that the new tax regime is now the default option, and a salaried individual must actively opt for the old tax regime. Failure to do so will result in salary taxes being deducted based on the new tax regime. Therefore, the tax advantages associated with investing in ELSS are only available to those who choose the old tax regime.
Investment amount
Most fund houses allow individuals to start with a minimum investment of Rs 500. Though there is no maximum limit on the investment amount, a tax break can be availed for a maximum of Rs 1.5 lakh under section 80C in a financial year. The investment in ELSS mutual fund schemes can be done either as a lump sum or via monthly systematic investment plans (SIP).
Also read: 7 lesser-known investments, expenses eligible for tax breaks
How to invest in ELSS
Before knowing how to invest in ELSS funds, ensure that you're KYC (Know Your Customer) compliant. If not, complete your KYC first. You can easily submit your KYC online through the mutual fund's website or the RTA (Registrar and Transfer Agent) website.
Here is a look at how you can invest in ELSS as per the Aditya Birla Sun Life AMC website.
- Once you're KYC compliant, you can purchase ELSS from an authorised mutual fund distributor or the mutual fund office. However, purchasing ELSS online is the most convenient and recommended way.
- Now, let's understand how to invest in ELSS online through the following easy steps.
- Visit the official website of the mutual fund and select the ELSS you want to invest in.
- Select the investment type- SIP or Lump Su
- Submit your PAN and Date of Birth. The website will automatically retrieve your KYC data.
- Verify your KYC data and fill up some additional personal information in the online form.
- Fill out your investment details like ELSS name, investment tenure, amount, etc
- Pay the amount online to begin your ELSS investment.
Since ELSS is a market-linked scheme, where investment value changes every day, your investment into a mutual fund scheme will be allotted the NAV of the day on which funds are credited to the mutual fund's bank account and is available for utilisation by the AMC.
NAV stands for Net Asset Value. It is the market value of the securities held by the scheme.
Also read: TDS on salary: How to avoid higher income tax under new, old tax regime
Liquidity
As mentioned above, ELSS mutual fund schemes come with the shortest lock-in period of three years from the date of investment. No redemption or switch is allowed during the lock-in period. Once the lock-in period is over, redemption will be done using the First-In-First-Out (FIFO) method, in case of multiple investments.
Taxation
Here is how ELSS investments are taxed, according to the ICICI Bank website:
- Section 80C deduction: If you invest in ELSS funds, you can get a deduction under Section 80C of the Income Tax Act. This lets you lower your taxable income by the amount you spent, up to a maximum of Rs 1.5 lakh per financial year. The money saved will not exceed Rs 46,800, depending on the tax bracket.
- Long-term capital gains (LTCG) tax: ELSS investments are locked in for three years. Any gains made after this time are considered LTCG and are taxed at a rate of 10% on amounts over Rs 1 lakh.
