1. During 'Investment Phase' Save tax up to Rs. 46,800
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 lakh can save tax up to Rs. 46,800, calculated at the highest tax slab of 30% including the 4% cess. The amount you invest in ELSS straightway gets deducted from your taxable income. For instance, your taxable Income from salary after standard deduction of Rs.40000 is 7,50,000 and that incurs you a tax liability of Rs. 65,000 as per your 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. 33,800. Thus, it saved you around Rs. 31,200.
2. In the 'Redemption Phase' get tax-free returns
Any dividends, returns or capital gains up to Rs 1 lakh for investments made in ELSS schemes are tax-free. Long-term capital gains from equity mutual funds above Rs 1 lakh would be taxed at 10 per cent without any indexation benefit. Other 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 capital gains up to Rs 1 lakh for a lock-in period as short as 3 years only.
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 up to Rs. 1.5 lakh 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.
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 armoury 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 2018-2019.
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