5 Key Things to Know About Tax Saver Funds

Every individual has a different investment objective. Some invest so that they can build a retirement corpus, while some invest to secure their child’s education, some have to save for their marriage while other aspire to buy an expensive car. Every investor has a unique investment objective which also helps them in effective financial planning. When you know your short term and long term goals, you can effectively invest and have a diversified portfolio. A lot of taxpayers wake up at the last moment during tax season and rush towards some tax saving scheme so that they can evade taxes. Rushing to last moment investment to save taxes might not be a good option because you may or may not have the lumpsum amount to invest and hence it is better to start investing at the beginning of the fiscal year so that you do not have to make last moment investments.

If you are a young investor who wants to save taxes and also seeks long term capital appreciation, you may want to consider investing in equity linked saving scheme (ELSS). If you wish to find out more on ELSS, read further.

What is ELSS?

Equity Linked Saving Scheme or ELSS is an open ended mutual fund scheme with a tax benefit. ELSS is the only mutual fund scheme as per Section 80C of the Indian Income Tax Act, 1961 which allows taxpayers to reduce their taxable income through investments in this tax saver fund.

Investing in ELSS has its own pros and cons. Here are a few things you need to know about this tax saver fund:

1. ELSS comes with a statutory lock-in

ELSS fund holders are entitled to a three year lock-in period which they have to abide by. This means you cannot withdraw or redeem your ELSS investments for at least three years. This may cut down the liquidity factor of an individual’s investment portfolio but this three year window gives ELSS investments an opportunity to grow. Hence, if you want to liquidate your portfolio during emergencies, do invest in some debt mutual funds as well. Also, this three year lock-in probably shortest among tax saving schemes.

2. ELSS has a tax benefit

Here’s an example to help you understand how ELSS can help you with saving taxes:

Shubhrank Deostali is an investment banker with a gross annual income of Rs. 14.5 lakhs per annum. This lands him in the 30 per cent tax slab. Shubhrank learns about ELSS a tax saving scheme and invests Rs. 1,50,000 in the scheme. This way, Shubhrank’s gross taxable income comes down to Rs. 13 lakhs and he will be only taxed for this figure.

3. ELSS offers long term capital gains

ELSS is a mutual fund scheme which invests predominantly in equity and equity related instruments. Historically, equity related instruments have given positive returns to those who remained invested for the long run. Hence, if you remain invested in ELSS keeping a long term investment objective, you may receive long term capital gains.

4. ELSS investments are subject to market risk

Remember that equity related investments are constantly exposed to the dangers of equities. So risk averse investors may have to reconsider investing in ELSS and might want to opt for other traditional tax saving tools like PPF or life insurance. So investors are requested to understand their risk tolerance and only then invest in ELSS.

5. ELSS has no upper limit

Another good thing about ELSS is that there is no upper limit. Although you cannot claim for tax deductions for more than Rs. 1.5 lakhs per fiscal year, you can invest in ELSS as much as you want. Basically, there is no upper limit and hence you can invest as much as you want.

Now that you know these key things about ELSS, are you planning to invest in this tax saving scheme this fiscal year?

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