Tax planning is one of the most important aspects of financial planning, that every investor must navigate carefully, in order to save taxes and not evade them. In this context, it becomes mandatory to discuss about mutual fund ELSS schemes. Also known as tax saving mutual funds, these are beneficial for investors who want to claim a tax deduction of upto Rs 150,000 from their taxable income as per the Income Tax Act, 1961.
In comparison to other tax saving investment options available in the market such as PPF, ELSS funds offers superior returns, helps to invest in stocks without taking direct risk and also generate long term wealth. Further, it offers the shortest lock in period and when continued with patience, it can help investors reach several desired financial goals.
Why invest in Tax Saving Mutual Funds?
- High returns – An opportunity to grow your money by investing in equity mutual funds and remaining patient throughout the process can yield high returns. One can invest here through lumpsum or SIP.
- Tax efficient – After the mandatory lock-in period of 3 years, if you redeem ELSS funds, it will attract long term capital gains. However, the tax on long term capital gain is only 10%, if the total gain in a year is over Rs 1 Lakh. Gains upto Rs 1 Lakh in a financial year is totally tax free.
- Least lock-in period – ELSS mutual funds has the least lock-in period of 3 years, as compared to PPF (15 years) and bank tax saving fixed deposits (5 years).
- Dividend payout option – You can also opt for dividend payout option on your ELSS investment which helps you get some profits even during the lock-in period of 3 years. You should note that the dividend is paid from the fund corpus, therefore, the NAV of the mutual fund Scheme falls to the extent of the dividends paid on the date of dividend.
How to start investing in ELSS funds?
To start your investment in the tax saving mutual funds, you need to be KYC compliant. You can make the investment either offline or online. In case of the former path, you need to visit the website of the AMC in question and follow the steps given by them to start the investment or one can visit the nearest branch of the fund house chosen, with a cheque and duly filled in physical form, in order to get the process started. In both these cases, an account number is allotted against which all the future ELSS investments can be made.
However, for online investments, the process is simple as you can invest in few clicks by visiting the mutual fund company website.
When a person decided to invest in ELSS mutual funds, they have to choose either of the options – Growth or Dividend.
In case of the first option, the investor does not get any dividends, they are realised directly at the time of redemption or switch. In the second case, the investor gets the dividend amount, as decided by the fund house directly in the bank account whenever the dividend is declared.
The basics of ELSS Mutual funds and how one can start investing in these tax saving options have been discussed at length, in this read. If an investor is serious about saving taxes, while making their savings compound over time, this is the path to choose.