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ELSS Mutual Funds | Tax Saving | Dialabank

Equity linked savings scheme(ELSS) Tax saving mutual Fund

Equity Linked Saving Schemes are mutual funds that are investments in equities or debt. These are eligible for Deductions Under Section 80C, as listed in the Income Tax Act of 1961. These are mutual funds that are invested in by the individual in equity funds such as diversified equity funds which have tax benefits. It is similar to the other Tax Saving Schemes, such as Public Provident Fund, Life Insurance, RGESS and so on.  The main advantages of these mutual funds is the three-year lock-in period of these funds, as compared to the PPF which has a lock-in duration of 15 years or NSC of 6 years. However, they come with a disadvantage of being highly risk-prone.

According to the Income Tax Act of 1961, under section 80C only investments up to Rs. 1,00,000 are eligible for deductions from the annual total income of the individual, thereby, reducing the total income taxable. For instance, if the total yearly income is Rs. 3,00,000 and one invests about Rs. 1,00,000 in these certain mutual funds, then the taxable income reduces to Rs. 2,00,000. Earlier there was an upper limit of Rs. 5,00,000 for investing in tax saving plans like ELSS. Only those individuals with an annual income lesser than Rs. 5,00,000 can invest in tax saving instruments. However, now these 

Previously there was an upper limit for investing in tax saving instruments like ELSS of 5,00,000. Only individuals with less than 5,00,000 annual income are allowed to invest in tax saving instruments. But last year financial budget removed this restriction and now any individual can invest in ELSS irrespective of their income level.


Advantages of Equity linked savings scheme (ELSS) over NSC and PPF

1. Main advantage of ELSS is its short lock-in period. Maturity period of NSC is 6 years and PPF is 15 years.
2. Since it is an equity linked scheme earning potential is very high.
3. Investor can opt for dividend option and get some gains during the lock-in period
4. Investor can opt for Systematic Investment Plan
5. Some ELSS schemes also offer personal accident death cover insurance
6. Provides 30 to 40% returns compared to 8% in NSC and PPF

Salient aspects of the scheme are as follows:

  1. An assessee can invest in Mutual Funds that offer Equity Linked Savings Schemes to get tax benefits.
  2. Investments made upto Rs. 1 lakh per year are exempted from payment of income tax under Sec 80C.
  3. The investments in ELSS schemes have a lock-in period of 3 years, i.e., investment period of at least 3 years is required to realize the tax benefits.
  4. The dividends earned in an ELSS are tax free.


Disadvantages of ELSS

1. Risk factor is high compared to NSC and PPF
2. Premature withdrawal is not allowed but it is allowed in other instruments in some specific conditions.


It recommends diversify your portfolio if it is your first SIP. I also recommend, to put a part of it in ELSS and a part of it in normal non tax saving schemes SIP.It does not matter which company you choose, because at the end of the day, all of them are dependent on the BSE index (except perhaps the Gold Funds). However, if you want an advise, Its recommend  to buy Birla and HDFC for ELSS and DSP Top 200 for non-ELSS funds.And as far as the portfolio is concerned, please invest in 3 mutual funds in the growth section and NOT the dividend pay out section.

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