Creating Wealth the ELSS Way

Written on Friday, December 15, 2017
By Sunil Dhawan

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What will you choose just tax saving or tax saving with wealth creation? For the dual benefit, you can explore Equity Linked Saving Schemes. These are specific mutual funds schemes that help you save for long-term goals and also saves tax with only a 3 year lock-in period.


While investing in equity mutual funds, as an investor you should keep your investments aligned with your long-term financial goals. In that way, your investment will not just help you in achieving your goals but simultaneously it will facilitate the tax saving purpose also.


Why is ELSS a valuable investment choice? 


The tax benefits of ELSS are not limited to the 'investment' phase only rather it is tax-efficient in the 'Growth-phase' as well as 'Redemption' phase also. That is why it has been given the EEE or the exempt-exempt-exempt status.


1. During 'Investment Phase' Save tax up to Rs. 46,350


By investing in ELSS, you can enjoy tax benefits u/s 80 C of income tax act. Under this section, investing up to Rs. 1.5 lakhs can save tax up to Rs. 46,350, calculated at the highest tax slab of 30% including the 3% cess. The amount you invest in ELSS straightway gets deducted from your taxable income. For instance, your taxable income is 7,50,000 and that incurs you a tax liability of Rs. 64,350 as per your 20% tax bracket. But on investing Rs. 1.5 lakhs in ELSS, your taxable income will reduce to 6,00,000, and then your tax liability would be Rs. 33,475. Thus, it saved you around Rs. 30,900.


 2. In the 'Redemption Phase' get tax-free returns


Any dividends, returns or capital gains for investments made in ELSS schemes are tax-free. Under section 80 C there are numerous instruments upon which you can invest your Rs. 1.5 Lakh for tax saving, but none of these except PPF give tax-free returns. The popular tax-saving options under Sec 80 C are NSC, Tax Saving Bank FD, Tax saving Post office, but there returns on maturity are taxable based on individual tax slab. However, interest in Public Provident Fund is tax-free, but that comes with a 15 year lock-in period (apart from certain exemptions to withdraw in between). ELSS is the only tax saving investment option that provides tax-free returns for a lock-in period as short as 3 years only. ELSS mutual funds invest in equity related instruments, thus, these get classified as equity funds and you must be aware that any returns received from equity funds after a holding of 1 year are tax-free. Hence, ELSS funds after its 3-years lock-in period offer tax-free dividends/returns/capital gains. 


3. In the 'Growth-phase' dividends are tax-free


During the lock-in phase, any income in the form of dividends received from such equity funds is tax-free in the hands of the investor. Even the long-term capital gains arising from the transfer of such units of an equity-oriented fund is exempted under section 10(38) of the Income Tax Act,1961.


ELSS potential for capital appreciation through equity exposure


The scheme invests in equity market by buying equity stocks of companies listed on the stock exchanges. Since the ELSS comes with the 3 year lock-in period, your money remains invested for three years, which is a reasonably suitable period for equity portfolios to accumulate profits and cultivate investor discipline.




Instead of a single ELSS scheme, diversify across different ELSS funds as you end up giving money to different fund managers to manage. Consider investing in consistently performing ELSS schemes and diversify across schemes that have small-mid and large cap exposure are some of the factors that can be considered. Also, the past performance may or may not repeat in future. Hence investors should consider this risk element before investing in such funds. Considering the returns and factoring in the tax advantage, ELSS is a double-edged weaponry in your armory for the creation of wealth in the long term.


#Mutual fund investments are subject to market risks. Please read the documents carefully before investing. All figures are approximate and calculated as per the tax rules applicable to the FY 2017-2018.

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