When talking about various tax benefits and tax incentives to the taxpayers under the Income Tax laws, deduction under Section 80C is one of the most commonly used tax benefit. It provides a deduction of up to Rs. 1.50 lakh to the taxpayers from their taxable income for making certain eligible payments and investment options. Such options include contributions to Public Provident Fund (PPF), Statutory Provident Fund (SPF), payment of Life Insurance Premium, housing loan repayment, 5-year tax-saver fixed deposits etc.
ELSS (Equity Linked Savings Scheme) is also amongst the eligible investment options under Section 80C, which invest minimum 80% of their net assets in equities and equity-related investments and carry a lock-in period of 3 years for the investors. With predominant investment in equity and equity related investments, the investors can benefit from the embedded potential of wealth creation and enjoy market-linked returns.
Advantages of ELSS Funds
ELSS is one of the most popular investment category for mutual fund investors, as substantiated by the largest number of investor folios across all different mutual fund categories. As on April 30, 2022, investors had 1.40 crore investor folios with ELSS funds (Source – AMFI – Association of Mutual Funds in India). Here are the following inherent advantages of ELSS funds:
- Tax Deduction
An investor can avail tax deduction for the actual amount invested by the investor, subject to the ceiling limit of Rs. 1.50 lakh under Section 80C for all eligible payments/ investments under the section taken together.
One can invest in ELSS in lump sum mode or through a Systematic Investment Plan (SIP). Investing in ELSS through SIP enables the investors to spread the tax-saving investments across the year, which takes off the investment pressure for tax-saving investments during the last few months.Further, the investors must note that taking tax benefit is not a prerequisite for investing in ELSS funds, and one can invest in ELSS funds even when tax benefit is not required. - Lock-in period
ELSS are subject to a lock-in period of three years, which is the lowest lock-in period amongst all the eligible investment options. The lock-in period is applicable for investments in ELSS funds from the date of investment and one cannot liquidate the ELSS investments before the expiry of 3 years. - Tax-efficient Returns
As per the tax laws, the capital gains from mutual fund investments are taxed at the time of redemption from such investments. As such, the taxpayer must pay tax only once the profits have been realized. This makes investing in mutual funds attractive compared to other eligible traditional investment avenues under Section 80C, wherein the interest income is generally taxed on accrual basis.
Since the funds are subject toa 3-year lock-in period, the gains from ELSS funds are classified as Long-Term Capital Gains (LTCG). LTCG on equity funds is taxed at 10% (plus cess and surcharge). Since no indexation benefit is allowed while calculating LTCG on equity funds, the taxable gain from ELSS funds can be calculated by deducting the redemption value from the cost of units redeemed. Additionally, there is zero tax on LTCG of Rs. 1 lakh every year on equity shares and equity funds, including ELSS, taken together. - Market-linked returns
Most eligible investment options under Section 80C provide fixed and guaranteed returns. However, investors can enjoy market-linked returns from their ELSS investments. Such funds are mandated under SEBI Guidelines to invest minimum 80% of their assets in equity securities. The investors get equipped with the potential of better returns through their ELSS investments. This augurs well for the investors who consider including ELSS investments in their financial plans and investing in ELSS funds with their long-term goals in mind.
How to invest in ELSS funds?
One can invest in ELSS funds by submitting the duly filled application form at any of the Official Points of Acceptance of the mutual fund. Once the application has been validated, the acknowledgment slip for the form submission will be time stamped and processed as per the cut-off time. Further, one can also invest in ELSS funds online by visiting fund’s website. Once the investor’s KYC status has been validated on the portal through PAN, one must enter necessary details, including the scheme name mode of investment, i.e., lumpsum or SIP, etc. After the details, the investor must pay towards lumpsum investment or the first SIP instalment. Once the payment is done, the acknowledgement is generated on the screen and shared through the registered e-mail address. The mutual fund house shares the account statement within 1-2 working days after processing the transaction. Such an account statement is valid proof for the investors to claim deduction under Section 80C in the Income Tax Return.
In case the investor has opted for SIP investing, they must register the SIP mandate on the bank’s Netbanking portal with SIP reference number and autopay instructions. Autopay instructions enable the bank to deduct the investment amount automatically from savings account when claimed by the mutual fund house. Upon receipt of SIP instalment from the bank, the payment is invested in specified ELSS fund by the mutual fund house.
How the lock-in period of 3 years works?
Here is how the lock-in of 3 years works for ELSS funds:
- Lowest Lock-in Period – ELSS investments carry the lowest lock-in period of 3 years amongst all the eligible investment options under Section 80C. This implies that the investors will be locked-in from liquidating their investments for the minimum period when compared with all the eligible tax-saving instruments.
- Embargo on Liquidation – During the currency of the lock-in period, there is an embargo on liquidation of investments made in ELSS funds. This means that the ELSS units cannot be liquidated before the holding period of 3 years is completed from the date of investment.
- Pledge not allowed during Lock-in Period - Such lock-in period of 3 years is applicable not only on the redemption of mutual fund units but also on pledging the units as well. As such, loans cannot be availed on security of such ELSS units during the lock-in period.
- Lock-in period for SIP Investments - In SIP investing, the lock-in period of three years is calculated separately for each investment and not from date of SIP registration itself. As such, each SIP instalment is considered as a separate lumpsum investment for purpose of lock-in period.
- Lock-in Period is not contingent on availing Tax Benefit - The lock-in period of 3 years is inherent to the ELSS category of mutual funds, irrespective of whether the investor has availed tax benefits for such investments or not. Such a lock-in period helps the investors resist the temptation to redeem their investments during a market downturn which is counterproductive.
- No Automatic Redemption on Expiry of Lock-in Period – Unlike most of the eligible investment options under Section 80C, which are liquidated automatically at the end of the specified tenor, there is no automatic redemption on expiry of lock-in period of 3 years. As such, the investors in ELSS funds enjoy the flexibility to continue with their ELSS investments even after the lock-in period. The investors must make a specific redemption request to liquidate their investments in ELSS funds.
With the lowest lock-in period of three years amongst all the eligible investment options and the benefits as discussed above, investors can consider investing in ELSS funds for financial goals longer than three years.Holding investment for a more extended period may aid investors in wealth creation and achieving financial goals.
Note: The tax provisions mentioned in the article are for illustrative purposes only and updated as per the Union Budget presented in the Parliament in February 2022. The deductions and lock-in period will be as per the provisions applicable on the date of investment, while the tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale.
Disclaimer
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
To know about the KYC documentary requirements and procedure for change of address, phone number, bank details, etc. please visit https://www.utimf.com/servicerequest/kyc. Please deal with only registered Mutual funds, details of which can be verified on the SEBI website under "Intermediaries/market Infrastructure Institutions". All complaints regarding UTI Mutual Fund can be directed towards service@uti.co.in and/or visit www.scores.gov.in (SEBI SCORES portal). This material is part of Investor Education and awareness initiative of UTI Mutual Fund.
Tax disclaimer -
Equity Linked Savings Scheme (ELSS) is an open-ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit. Minimum investment in equity & equity related instruments - 80% of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance). As per the present tax laws, eligible investors (Individual/HUF) are entitled to deduction from their gross total income, of the amount invested in equity linked saving scheme (ELSS) upto Rs. 1,50,000/- (along with other prescribed investments) under Section 80C of the Income Tax Act, 1961. Subject to prevailing tax laws.
