What are Tax/ELSS Funds?
Section 80C of the Income Tax Act allows for a deduction of up to Rs. 1.5 lakhs from an assessee’s taxable income if the assessee invests in any of the instruments mentioned under this section. There are various instruments that can avail the benefits of Section 80C, like, Public Provident Funds (PPF), National Savings Certificates (NSC), Fixed Deposits (FD) and the latest, fast-growing Equity Linked Saving Schemes (ELSS). Among all these investments the ELSS has the shortest lock-in period of 3 years and, even though they carry higher risk, can reward the investor handsomely. Here are some things to keep in mind while investing in ELSS:
Proof of Identity (KYC)
Any investment in mutual funds requires the investor to be KYC compliant, this stands true for ELSS as well. It is mandatory for the investor to provide a proof of address and proof of identity, an in-person verification also has to be completed before investment.
Investments in ELSS can be as low as Rs. 500 and there is no upper limit to investment. Even though there is no upper limit to investment, a maximum deduction of Rs. 1.5 lakh will be available on the investor’s income.
Investors can invest in an ELSS through either a lump sum investment or through a Systematic Investment Plan (SIP). A SIP deducts a predetermined amount from the investor's bank account periodically to invest in an ELSS.
Statement of Account
After an investment is made in an ELSS, the Asset Management Company sends the investor a Statement of Account to verify that the investment has been made. The Statement of Account can be used as Proof of Investment for taxation purposes.
An ELSS comes with a minimum 3-year lock-in period and the amount invested cannot be withdrawn or transferred during this time. If an investor invests through SIP in ELSS they can stop the SIP at any time and the units purchased will mature three years from the date of purchase. So if an investor makes an investment in three installments through SIP in January, February, and March 2018, the units will mature in January, February, and March of 2021 respectively.
A maximum deduction of up to Rs. 1.5 lakhs from the investors’ income is allowed for investments in ELSS. During redemption, long-term capital gains will be taxed as prescribed in the Income Tax Act @ 10%.
ELSS are suited to investors seeking long-term capital appreciation as the mandatory lock-in period for these funds is 3 years. As these are equity-linked they carry a considerable amount of risk, investors in such schemes should have a high tolerance for risk.