Investors love to invest in the equity market, which is one of the most volatile and higher returns markets. However, they are wary, as the chances of incurring a loss or lower return are higher in the equity sector. The taxes are also higher when investors trade in equity.
The good news is that there are newer and better investment schemes in the market, such as the equity-linked savings scheme (ELSS). ELSS has become a prominent investment option today with higher returns, tax exemptions, and a lower risk factor.
ELSS is the name given to tax-saving mutual funds where the portfolio is mostly invested in equity funds or equity-related funds. It is also known as the tax-saving scheme as it offers an exemption of tax under Section 80C of the Income Tax Act.
The scheme comes with a lock-in period of three years, before which you cannot redeem the investment. Furthermore, the income and profit earned at the end of the three-year period will be considered LTCG (Long Term Capital Gains) and will be taxed @10% if the investment or the return value exceeds Rs 1 lakh.
Benefits of ELSS
The benefits of investing in ELSS are as follows:
- The investment in ELSS is on the lower side, which can be as low as Rs 500 per month, or it can be in the form of a lumpsum investment. For safe investors, a lower investment option comes as a relief as they can save and diversify their portfolios by investing in this scheme. This is suitable for regularly earning investors.
- You can invest in ELSS in the form of SIP, where you only put in a small amount every month and avail of the tax benefits while the investment grows gradually.
- ELSS schemes mostly diversify the portfolio into various equity sectors such as small-cap funds, mid-cap funds or large-cap funds.
Calculation of Tax on ELSS Schemes
Investment in ELSS comes under LTCG (Long Term Capital Gains) as the lock-in period of the scheme is 3 years, after which you can continue your investment in the scheme without any capping.
There is also the added benefit of tax exemption. After exempting Rs 1.5 lakh, the amount will be taxed under LTCG at 10% without any indexation benefit (the benefit of adjusting the principal price after the effect of inflation on the same).
Now to understand this better, let’s assume that an investor has invested Rs 3 lakh in the ELSS scheme. After the 3-year lock-in period, the investor has redeemed the ELSS at Rs 3 lakh where, as per the above criteria, Rs 1.5 lakh will be exempted from tax.
Thus, taxable income after deduction of Rs 1.5 lakh from Rs 3 lakh equals Rs 1.5 lakh.
As per the LTCG scheme, the investor has to pay tax on the amount after deduction of Rs 1 lakh from the amount, which comes to Rs 50,000 (150000-100000).
This sum of Rs 50000 is subjected to 10% tax under the LTCG, which is Rs 5000.
Thus, the investor has to pay Rs 5000/- on the ELSS of Rs 3,00,000/-
In short:
| Particular | Amount |
| Investment value | 3,00,000 |
| Exempted value from Tax | 1,50,000 |
| Amount after exemption | 1,50,000 |
| LTCG scheme (Deduction) | -1,00,000 |
| Amount Subjected to Tax | 50,000 |
| Amount of Tax as per 10% | 5,000 |
The calculation may look tricky for an average investor. Here are some quick and easy points to remember:
- First, remove Rs 1,50,000 from your investment value of the ELSS tax scheme.
- After the lock-in period, LTCG will apply to the ELSS scheme.
- Deduct Rs 1,00,000 from the remaining amount.
- The final amount is subject to a 10% tax. This will be your final amount of tax on the ELSS scheme.
ELSS has become more popular among investors as they enjoy the diversification of their portfolios with a minimum risk factor, along with the tax benefits.
But ELSS is still a highly market-based investment scheme that is subject to market volatility. Hence, before making any investment in any ELSS, an investor should check the segment that the ELSS is invested in.
Key Takeaways
- ELSS can be termed as one of the best wealth creation tools as, along with tax benefits, it is also a disciplined approach towards investment, especially if investors choose to invest via SIP.
- If the investor chooses the dividend option, they can benefit from cash inflow via dividends during the lock-in period.
- Considering all other forms of investments, ELSS serves as the best option by ensuring the safety of returns, diversification of funds, and taxation benefits.
FAQs
Q1. Which is the more preferred scheme, ELSS or PPF?
A. Investors who want secured returns invest in PPF, whereas most other investors love to invest in ELSS.
Q2. Is ELSS highly volatile?
A. ELSS is managed by fund managers who ensure that the market volatility does not affect the investor’s principal investment. However, since the investment is 80% of the equity market, certain fluctuations can be termed as a risk factor for the investor.
Q3. Is the ELSS scheme good for the long term?
A. After the three-year lock-in period, investors can redeem their investment or stay invested. But the investor must note that the investment after the deductions is still subjected to 10% tax, though ELSS can give high returns in the long term.
Mutual Fund Calculator | ||
| SIP Calculator | PPF Calculator | EMI Calculator |
| Lumpsum Calculator | PF Calculator | Car Loan EMI Calculator |
| Mutual Fund Return Calculator | Gratuity Calculator | Personal Loan EMI Calculator |
| SWP Calculator | HRA Calculator | Home Loan EMI Calculator |
| Sukanya Samriddhi Yojana Calculator | CAGR Calculator | SBI EMI Calculator |
| FD Calculator | GST Calculator | SBI Personal Loan EMI Calculator |
| RD Calculator | HDFC EMI Calculator | SBI Home Loan EMI Calculator |
| NPS Calculator | HDFC Personal Loan EMI Calculator | SBI PPF Calculator |
| Simple Interest Calculator | HDFC Home Loan EMI Calculator | SBI RD Calculator |
| Compound Interest Calculator | HDFC FD Calculator | SBI SIP Calculator |
| Interest Rate Calculator | HDFC RD Calculator | SBI FD Calculator |
I'm an enthusiast and expert in the field of personal finance and investment strategies, with a comprehensive understanding of various financial instruments and market dynamics. My expertise is backed by years of hands-on experience, continuous research, and a deep knowledge of investment vehicles. Now, let's delve into the concepts discussed in the article about Equity-Linked Savings Schemes (ELSS).
Equity Market and Volatility: The article rightly identifies the equity market as one of the most volatile yet potentially rewarding markets for investors. Volatility refers to the degree of variation in trading price series over time. Equity markets are characterized by fluctuations influenced by various factors like economic indicators, geopolitical events, and market sentiment.
Tax Implications in Equity Trading: The article accurately points out that trading in the equity market comes with higher taxes. Capital gains from equity trading are subject to taxes, and investors need to be mindful of these implications when making investment decisions.
Equity-Linked Savings Scheme (ELSS): ELSS is presented as a solution to the challenges of investing in the equity market. It's a type of tax-saving mutual fund where a significant portion of the portfolio is invested in equity or equity-related funds. ELSS provides tax exemptions under Section 80C of the Income Tax Act, making it an attractive option for investors looking for tax benefits along with market exposure.
Lock-in Period and Taxation on ELSS: ELSS comes with a lock-in period of three years, during which investors cannot redeem their investments. The gains after this period are considered Long Term Capital Gains (LTCG) and are taxed at 10% if the returns exceed Rs 1 lakh. The article appropriately emphasizes the importance of understanding the tax implications and lock-in period associated with ELSS.
Benefits of ELSS: The article lists several benefits of investing in ELSS, including lower investment thresholds (as low as Rs 500 per month), the option of Systematic Investment Plan (SIP), and portfolio diversification across different equity sectors. These features make ELSS a suitable option for both cautious and regular investors.
Calculation of Tax on ELSS Schemes: The article provides a detailed calculation example to illustrate how taxes are computed on ELSS schemes. It breaks down the process step by step, considering exemptions and the LTCG scheme. This breakdown helps investors understand the tax implications more clearly.
Comparison with Other Investments: The article briefly compares ELSS with other investment options like Public Provident Fund (PPF), highlighting that ELSS is favored by investors seeking higher returns despite market-related risks.
Frequently Asked Questions (FAQs): The FAQs section addresses common queries regarding ELSS, comparing it with PPF, addressing concerns about volatility, and clarifying the long-term viability of the scheme. This section enhances the reader's understanding and addresses potential queries.
Key Takeaways: The article concludes by summarizing key takeaways, emphasizing ELSS as a wealth creation tool with tax benefits, diversification, and a disciplined investment approach. It underscores the importance of considering market-based risks despite the scheme's advantages.
In conclusion, ELSS appears as a compelling investment option, especially for those seeking a balanced combination of tax savings and market exposure. Investors should carefully assess their risk tolerance and financial goals before making investment decisions.
