The financial year has just ended and I came across many of my friends doing last minute investments for tax. Such investments ranged from a deposit in PPF, tax saver fixed deposits, taking new insurance policies etc. One thing which was quite uncommon was investing in Mutual funds for the purpose of tax saving. Hence, I just thought to share about tax saving MFs, commonly referred to as Equity Linked Savings Schemes (ELSS).
Here are four things you must know about ELSS:
What is ELSS?
ELSS is a specific category of equity oriented mutual funds which have been made eligible for tax deduction under Section 80C of the Income Tax Act, 1961. Since these are equity oriented funds, more than 65% of the portfolio remains invested in equities and is also coupled with a lock-in period of 3 years.
Benefits of Tax Deduction
As per the maximum limit prescribed under the Income Tax Act, you may avail a tax deduction up to a maximum of Rs. 1.50 lakhs for investing in ELSS. Any investment made during the year beyond this limit will not enjoy any tax benefits, but still be subject to lock-in period of 3 years.
How is ELSS better than other Tax Savers?
It has the lowest lock-in period of three years when compared with other tax saving options.
Further, ELSS has the potential to generate better returns over the mandatory lock-in period since equities have historically performed well over the longer periods.
Taxation of ELSS
Since amount under ELSS has to remain invested at least for 3 years due to lock-in period, the returns from such funds are presently tax free.
ELSS scores well over other tax saving options. You can also start a monthly SIP in such funds so that the deductions for tax savings happen over a period and don’t stress the finances over the last months of the year. Do consider investing in ELSS and be counted as a smart investor.
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