Equity-linked savings scheme (ELSS) is an investment option made for capital appreciation and tax savings. It is basically a mutual fund that invests in equities primarily, making it a good option if you are an investor trying to appreciate your capital. Furthermore, it comes under section 80C of the income tax act of India, 1961. Under the scheme, you can save up to Rs.1.5 lakh in tax for your contribution to ELSS. ELSS does have a higher risk due to its higher equity presence. If you are trying to invest in ELSS, below are five things to keep in mind before you do.
Tax benefits
ELSS is primarily a tax-saving option. Hence, it is imperative to understand the tax benefits of ELSS before investing.
ELSS comes under section 80C of the Income Tax Act, 1961. Other options under the scheme include EPF, PPF, NPS, tax saver FD, etc., and they all have a longer lock-in period than ELSS. The total benefits under all these 80C investment options are collectively restricted to Rs.1.5 lakh. You will not be able to claim Rs.1.5 lakh benefit for each option.
Hence, if you claim or even invest in ELSS for tax savings, ensure you consider all your 80C investments and act accordingly.
Also, the long-term capital gains tax exemption is limited to Rs.1 lakh profits. You will have to pay a 10% flat income tax for the rest of your income from ELSS.
Lock-in period
ELSS has a lock-in period of three years. Unlike some other investment options, there is no way to redeem your units before the lock-in period. This could limit the liquidity your investment has.
You have to be careful about the lock-in period if you are investing through SIPs. This is because each SIP investment will have a three-year lock-in period, and you cannot withdraw your whole corpus when the first SIP turns three years.
Portfolio composition
As said above, ELSS is a fund that focuses on equity. But at the same time, there are different ELSS funds that match different investors. For instance, if you are a really aggressive investor, you may want to invest in an ELSS fund with a maximum allowed equity presence. You could also invest in a fund that invests in a growth-focused ELSS.
At the same time, if you are a conservative investor, you could invest in a fund with a considerable amount of debt in the portfolio.
You could also do your research to choose a fund that has future potential since the investment is for a minimum of five years.
Mind the expense ratio
Expense ratio is another factor that you should keep an eye on. It is the fee that is charged by the fund houses for the upkeep of your fund. This includes compensating the fund manager.
Now, different ELSS funds may have different expense ratios depending on several factors. It is a wise idea to research the same and invest in an ELSS fund with a reasonable expense ratio. This is because a higher expense ratio could eat into your earnings.
Invest according to your goals, risk appetite
ELSS could be a beneficial option. But make sure you invest in ELSS only if the same meets your goals and risk appetite. For instance, if you are a risk-averse investor, there will be no way for you to avoid the risk completely. Hence, another option could work better for you.
At the same time, if ELSS suits your goals, ELSS could be extremely beneficial.
Conclusion
ELSS is a good tax saving and corpus-building option. Ensure you consider the five points below to make sure you invest right.
