Equity Linked Savings Scheme (ELSS) is an equity oriented diversified mutual fund scheme which not only helps investors build their wealth, but also saves taxes at the same time. By investing in ELSS funds, an individual can claim a deduction from his/her gross total income of up to Rs 1.5 lakh under section 80C of the Income-tax Act, 1961. As compared to other tax saving instruments such as tax saving FDs, PPF, ELSS funds have higher risk and volatility because their returns are market performance based. One can choose to invest in ELSS, if they are willing to bear some amount of risk and stay invested for the long period.
From FY 2020-21, an investor can make a choice between the old tax regime and the new tax regime. In the former, an individual can continue to avail of the existing tax exemptions and deductions. On the contrary, a new tax regime offers a lower, concessional tax regime without any tax exemptions and deductions. The tax breaks that will be forgone under the new tax regime will be Section 80C, Section 80D, Section 80TTA etc.
To know how to invest in ELSS, an investor needs to be mutual fund KYC compliant. He/she can make the investment either online or offline. In case the investor is not mutual fund KYC compliant, he/she can make the KYC online from any mutual fund company website or the RTA (Registrar and Transfer agent) website. Making the online KYC is simple and you need to have a PAN Card and address proof like, Aadhar Card, passport, any utility bill or any Government ID. The KYC is video based which helps validate your documents and also takes your photo.
How to buy ELSS offline: You should contact a mutual fund distributor who will help you with filling up the form and guide how to invest in ELSS funds, collect investment cheques and deposit with the mutual fund company office. The mutual fund distributor can also help you in making mutual fund KYC (if you do not have one) and guide selecting good ELSS mutual fund schemes.
How to invest in ELSS online: In case you want to invest in ELSS mutual fund online, you have 3 ways:
Visit the mutual fund company (AMC) website
Visit the RTA (registrar and transfer agent) website
Visit online mutual fund platforms
Once you are at any of the above websites, you will have to register on the website – to register, usually you are asked to enter the mobile number, email ID and PAN number. Once you enter the PAN number, the website automatically verifies whether you are a mutual fund KYC complaint or not.
If you are a mutual fund KYC complaint, the investing process is pretty straight forward. You can select the scheme, plan in which you want to invest (regular or direct) and the option (dividend payout or growth) you want to opt. Another step is to decide whether you want to invest in a lump sum or SIP. Based on what your need is, you can choose the appropriate option. After you have entered all the details, you can pay online from your bank account using the net-banking option.
However, before buying an ELSS fund from any mutual fund online platform, you should check if the platform offers regular plans or direct plans. Usually, one platform offers only one plan. Therefore, you need to choose a platform which offers you to buy the plan in which you want to invest.
You should also note that a mutual fund company website will allow you to invest in both the plans, regular and direct, but the scheme would be of that AMC only. However, RTAs offer you to buy online both the plans across the AMCs they service.
Before exploring further how to invest in ELSS funds, you should also know how to select a good ELSS mutual fund scheme, how much to invest in the ELSS scheme, ELSS taxation and the benefits.
Selecting a good mutual fund scheme : You should consider simply two things:
How the ELSS scheme has been performing compared to its peers
Has the scheme been able to beat the ELSS Category average returns and Benchmark returns over various time periods?
If the ELSS schemes are matching these criteria, you can invest in any 1 or 2 scheme based on your investment amount.
How much to invest in an ELSS fund – It should depend on what is your taxable income and the taxes thereon. Remember, you can invest maximum Rs 150,000 in a financial year to avail the tax benefit under Section 80C of The Income Tax Act 1961.
We discussed how to invest in ELSS. Let us now understand the taxation for ELSS. Investments made in ELSS schemes offer tax benefits under section 80C. Once the lock-in period of 3 years is over, any redemption or switch out made in the ELSS scheme will attract tax liability. According to the current tax laws, the profits made are tax free upto Rs 1.00 Lakh in a financial year and thereafter, it is taxed at the rate of 10% only.
ELSS mutual funds as a category has given returns of 21.39%, 14.87% and 16.49% respectively in the 3,5 and 10 years period which is much higher than PPF and tax saving FD which is around 8% and 7% respectively. ELSS Mutual Funds, therefore, offer the opportunity of both tax savings as well as wealth creation over a long investment horizon.
The other benefit of investing in ELSS is the least lock-in period of 3 years compared to 5 years for tax saving FD and 15 years for PPF.
While we discussed at length how to invest in ELSS and also how to invest in ELSS online, as an investor you should first figure out which is a good ELSS mutual fund scheme for you to invest and also how much to invest depending upon your total gross income and tax liability thereon.
A mutual fund distributor can always guide you on how to buy ELSS.