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There are some mutual fund (MF) schemes specially created for offering you tax savings, and these are called Equity Linked Savings Scheme, or ELSS. The investments that you make in ELSS are eligible for deduction under Sec 80C.
It also provides an opportunity for long term capital appreciation. An ELSS fund manager invests in a diversified portfolio, predominantly consisting of equity and equity related instruments that carry high-risk and have the potential to deliver high-returns.
Since it is an equity fund, the returns from this scheme are market determined.
Top five features of ELSS Funds:
• Three-year lock-in period
• Can be held even after the completion of three years
• Offers dividend as well as growth options
• Tax Saving instrument
The returns from an ELSS fund are tax free in your hands. The long term capital gains from an ELSS are tax free as well. This is because no tax is levied on equities that are held for more than a year. Since an ELSS falls under section 80C, you can claim up to Rs 1.50 lakh from your investment as a deduction from your gross total income.
Why prefer ELSS over other tax saving schemes:
Shorter lock-in period:
An ELSS has a lock-in period of only three years as compared to other tax saving instruments such as Tax Saving Fixed Deposit which has lock-in period of five years and a NCS which has a lock-in for six years.
Long term capital gains:
Since an ELSS fund invests in equities, and is dynamically managed by a professional fund manager; it has the potential to provide long term capital gains compared to other passively managed asset classes.
Systematic Investment Plan (SIP) is an investment vehicle offered by mutual funds to investors, allowing them to invest using small periodically amounts instead of lump sums. One can plan effectively and invest in ELSS through the SIP (Systematic Investments Plans) route.
One needs to bear in mind that the returns of the ELSS schemes are determined by the performance of the equity market.