As a responsible member of society, you must pay your income tax on time. But this does not mean you should not save money on your taxes. Several tax-saving schemes under the IT Act allow you to invest your money. It allows you to save on your income tax and create a corpus for future needs.
One of the most popular tax-saving investments is ELSS mutual funds. Equity Linked Savings Scheme (ELSS) is a tax-saving mutual fund scheme that is very popular. Many people invest in ELSS to save on taxes and grow their money with equity exposure.
Read on to learn why you should opt for tax-saving mutual funds.
Tax-saving mutual funds
ELSS is one of the popular tax-saving schemes that involve investing your money in mutual funds, helping you save income tax. ELSS funds mostly put their money into stocks or other securities that are linked to stocks, like listed shares.
Some of the key aspects of ELSS funds are as follows:
- Lock-in Period: ELSS funds come with a lock-in period of 3 years. During this time, you will not be able to withdraw your money. After 3 years, you can either choose to keep the money or reinvest it in ELSS. There is no limit on how long you can keep the money in ELSS.
- Equity Link: ELSS funds must invest 80% of the money in equity or similar assets, like shares. The other 20% of the money can go into hybrid or debt funds to reduce the risk posed by equity.
- Options: You can invest your money in ELSS funds in two ways: as a lump sum or as an SIP. Under SIP, you can put the money in ELSS at regular intervals. Most people opt for a monthly SIP, while some opt for alternatives. In the case of a lump sum, you can invest the money as and when you want during a financial year.
- Management: Fund managers, experts in the field, usually manage ELSS funds like other mutual funds. They do not make decisions based on market speculation but rather on research and studies.
- Tax Savings: ELSS is one of the most popular tax-saving investments. You can claim a tax rebate of up to Rs. 1.50 lakhs under Sec. 80C of the IT Act for the money you put in ELSS funds in a financial year. This money will be locked in for three years.
Why Choose Mutual Funds as Tax-saving Investments?
You might be unsure if you should choose ELSS mutual funds to invest and save on taxes. ELSS funds have emerged as one of the most popular tax-saving schemes for investors.
Here are some of the reasons you should prefer ELSS to invest your money:
- Short Lock-in Period: There are many ways to save taxes, but most schemes have long lock-in periods. It means you will not be able to access your money for that period. This is where ELSS comes up as a great choice for tax saving. The lock-in period here is only 3 years, which is quite less compared to other options. After that, it is up to you whether you want to keep the ELSS going or withdraw the funds.
- Multiple Options: You can invest your money in ELSS in two ways. One option is as a lump sum where you put your money in one go at any time of the year and as per your choice. The other option is SIP, where you put a fixed amount down monthly or at a predetermined time gap. This way, you can spread out the money you need to invest.
- Flexible Tenure: With ELSS, there is a lock-in period but no maximum period for which you can keep your money. Most other tax-saving investments have a limit of 7 to 20 years maximum. But this is not the case with ELSS, as you can keep your money for as long as you want. This ensures that you can earn a high profit on your money due to compounding.
- Professional Advice: Experts in finance handle ELSS funds for different schemes. They base their decision on in-depth research and take all steps possible to reduce the risks of equity markets. It ensures that your money is in safe hands. Since ELSS schemes come under the purview of SEBI, mutual fund companies cannot hide any information from you.
- Higher Returns: When compared with other tax-saving schemes, ELSS offers high returns on the money you invest. This is because 80% of the money goes towards equity, and over a period, you can earn good returns from ELSS since there is no cap on the profits. In the case of other options like PPF, the government credits the interest rate every year, thereby limiting your profits.
ELSS funds are very popular with people who can take a little risk to make more profits and save on taxes. You must opt for an ELSS fund based on in-depth research. If you are unsure about tax-saving investments, visit the Piramal Finance website. They have many articles that will help you decide whether to invest in mutual funds or other tax-saving schemes.