ELSS - Equity Linked Saving Schemes || Tax Saving in India under 80c

What is ELSS?

Equity Linked Saving Schemes - or ELSS - are a type of tax saving mutual fund investment.

A mutual fund investment pools money from many investors and attempts to reward them with profit. This profit is generated through investments in companies and income-generating opportunities. The profits earned by the fund scheme are distributed amongst the investors in the form of regular payouts or a large one-time payment at the end of the fund’s tenure.

Tax saving mutual funds like ELSS do the same thing, but also give enable you to obtain exemption of up to Rs.1,50,000 of your annual income from tax in India.

Investments that can provide the highest yield are equity investments - but these are considered to be high-risk. Lower-risk investments in debt instruments also exist, but they cannot match the high returns provided by equity investing. Mutual funds differ primarily based on the type of asset class. There are three primary types of mutual funds on this basis:
Equity-oriented funds - which invest primarily in stocks and shares of companies.
Debt-oriented funds - which invest primarily in treasury bills, certificates of deposit, bonds, etc. of companies and the government.
Hybrid funds - which invest in a mix of both. A hybrid fund can be either an equity-oriented hybrid fund or a debt-oriented hybrid fund depending on where at least 65% of its corpus has been invested.

Equity Linked Savings Schemes (ELSS), as the name suggests, invest primarily in equity.

ELSS pools money from many investors and invests most of it into stocks and shares of companies and invests the remainder into fixed income securities like bonds. The fund has a 3-year lock-in for investors, meaning that the fund manager has a 3-year timeframe in which to maximize the possible returns on investment. This investment avenue has gained a lot of popularity in recent years as a way to save on taxes - as Indian taxpayers can reduce their taxable income by Rs.1,50,000 under Section 80C of the Income Tax Act, 1961. Income earned at the end of the 3-year tenure is also exempted from taxation if it’s under Rs.1 lakh, any income over Rs.1 lakh is taxable at 10% under Long-Term Capital Gains (LTCG) tax.

Why invest in ELSS?

ELSS allows Indian citizens to reduce their taxable income by Rs.1,50,000 under Section 80C. There are other investment options that help save under this same Section, but ELSS offers the lowest lock-in obligation of 3 years and the possibility of the highest returns. The funds invested in ELSS schemes are exempted from taxation, but if the returns on investment are greater than Rs.1 lakh, they are charged tax at 10% under LTCG.

ELSS investments have historically provided excellent returns when compared to similar forms of investment. This investment avenue is also popular with experienced investors who wish to add an equity component to their existing investment portfolio

When is the best time to invest in ELSS?

Investments in ELSS can be made at any time during the year. Most often, however, ELSS investments see a spike in popularity just before the tax filing season, as Indians scramble to reduce their tax liability by any means possible. Tax saving mutual funds get very popular around this time. Thus, those that invest in ELSS at the end of the financial year will definitely save on taxes, but have almost no chance to benefit from any capital growth nor receive any dividends in that financial year.

The best time to invest in ELSS is at the start of the financial year, i.e. after April 1st. Since ELSS is an equity-oriented investment, it’s a good idea to average out the Rupee-cost by investing in ELSS every month through SIP. Systematic Investment Planning (SIP) allows investors to get the most bang for their buck by providing a higher number of fund units when prices are low, and fewer units when prices are high - thus averaging the cost per unit over time. Thus, regular SIP investments in ELSS has the potential to provide the highest returns along with being a tax-saving investment.

Benefits of ELSS

Given below are some of the advantages of ELSS and benefits of investing in ELSS funds: Saves up to Rs.1,50,000 of annual income from taxation.
Earns the highest possible returns offered by any tax saving investment (as proven by historical ELSS performance data).
Lowest lock-in period of 3 years among all other tax saving investments.
Helps during online income tax e-filing as all the details are made available online as well.
Possible to invest via SIPs - meaning that a lump sum investment is not required, and all the tax benefits still apply.
Dividend and growth options - ELSS mutual funds allow investors to choose how their profits earned are treated and paid back - either as regular dividends or as a lump sum on maturity.

How to claim a tax deduction with ELSS

Given below is a step-by-step guide on how to save on taxes with an ELSS investment online.
Assuming that the entire Section 80C quota of Rs.1,50,000 has been invested in ELSS:

Step 1: Visit your chosen online income tax e-filing portal, and log in to begin filing income tax return.

Step 2: Upload your Form 16 as provided by your employer, or furnish a form 16 on PDF and upload the same into the online tax filing portal.

Step 3: Once the basic information has been auto-populated, find “Deductions under Section 80C” and look for “ELSS” or “Mutual Fund”

Step 4: Enter the invested amount (Rs.1,50,000 in this case) and hit submit. The online tax filing platform will register the same and show you your annual taxable income with tax liability reduced by Rs.1,50,000.

Step 5: The platform will also inform you if you are eligible for an Income Tax refund that year, or whether you still have an outstanding tax liability.

Step 6: Finish filing taxes as per prompts from the tax filing website and await email confirmation from the Income Tax department once they receive your file.