7 Common Misconception about Tax Saver Mutual Fund (ELSS)

Article dated 24^th Jan, 2020.

Tax planning is an integral part of many investment planning individuals. Like all investment planning, tax planning should also be taken seriously as you do not want to pay the government a sizable portion of your hard earned money. There are several sections (Section 80D, 80DD, etc.) under the Indian Income Tax Act that host tax-saving instruments, where a taxpayer may invest and seek tax deductions [1] . Similarly, Section 80C, which also falls under the Income Tax Act, 1961, hosts a series of investment options where investors can claim up to 1.5 lakhs worth of tax deductions from their annual income. One such tax saving tool is ELSS.

Investors in search of a feasible tax solution may have come across ELSS as one of the options. Under Section 80C* of the Indian Income Tax Act of 1961, investors can invest up to Rs. 1.5 lakh annually in ELSS and claim tax deductions from their annual income. ELSS is the only mutual fund scheme which is eligible for tax deduction. Because ELSS is a subcategory of equity mutual funds, there are some misunderstandings in the minds of taxpayers. This also may be one of the reasons why several taxpayers opt-out from even considering ELSS as a tax saving tool option.

Today we will take a look at few misconceptions surrounding ELSS. But first, let us understand what ELSS is?

Equity Linked Saving Scheme (ELSS)

Equity Linked Saving Scheme, commonly referred to as ELSS, is a tax saving mutual fund scheme which comes with a predetermined lock-in of three years. ELSS offers investors an opportunity to seek some capital appreciation through equity investments along with tax-saving benefits. If your annual income is taxable, an ELSS scheme might be able to help you bring down your taxable income by Rs. 1.5 lakhs. ELSS primarily invests in equity and equity related instruments. Because it has a mandatory lock-in period of three years, you can only redeem your ELSS investments after the lock-in period is over.

What are some of the misconceptions surrounding ELSS?

1. ELSS is only good until its three year lock-in period: Just because ELSS has a lock-in of three years doesn’t necessarily mean investors should immediately withdraw their ELSS investment after three years. Investors may choose to remain invested in order to increase their chances of gaining some returns. Taxpayers must bear in mind that paying tax is an ongoing process, and hence, they can plan ELSS investments for the long term.
2. ELSS only helps in saving tax: Yes, it is a stated fact that as per the Indian Income Tax Act1961, all investment instruments including ELSS which come under Section 80C can help individuals save some tax up to Rs. 1, 50,000 p.a. ELSS invests largely in equity and equity related instruments. Hence, it has the potential to offer some returns and hence, can be treated as any other equity scheme. Who knows, if staying invested for the long run, ELSS might be able to help investors in reaching closer to their financial goal.
3. You must not invest in more than one ELSS product: Another misconception among taxpayers is that they need to continue investing in the same ELSS scheme year after year in order to claim tax saving benefits. This is not at all true because one can choose to invest in any ELSS product of their choice. Taxpayers can invest in multiple ELSS products in order to claim tax deductions. Remember that ELSS investments of up to Rs.1.5 lakh each financial year qualify for tax deductions.
4. ELSS has a high expense ratio: For starters, ELSS funds do not hold any entry or exit load. To add to that, ELSS comes with a mandatory lock-in period of three years. It offers expense ratio equivalent to equity mutual fund schemes.
5. ELSS can be confusing to understand: Actually, that’s not true. ELSS is an open ended equity mutual fund scheme. As per SEBI guidelines, ELSS must invest a minimum of 80 percent of the total assets in equity and equity related instruments. This makes ELSS a moderately high risk profile scheme. Also, the scheme’s performance is highly dependent on the performance of the equity markets. Understanding all this wasn’t that confusing, was it?
6. You can invest in 1.5 lakhs per fiscal year: A lot of taxpayers are confused about this. Listen carefully. There is no upper limit for ELSS investments. But one cannot claim for tax deductions worth more than Rs. 1.5 lakhs annually from their ELSS investments.
7. ELSS need a large investment amount: Investors, if they wish to, can start investing in ELSS with an amount as low as Rs. 500 per month through SIP. Systematic Investment Plan or SIP is a systematic approach where investors can instruct their bank to deduct a predetermined amount on a predetermined date every month and electronically direct it towards their ELSS investment. 

We hope that the above points were able to clear some misconceptions that you had in mind about ELSS. Axis Long Term Equity Fund is an open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit. So are you ready to save tax this fiscal year by investing in an ELSS scheme like Axis Long Term Equity Fund? Download Axis MF's ELSS app today to get started and simplify your investment journey!

*As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab. Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS.

Source-

[1]https://www.incometaxindia.gov.in/Pages/tools/deduction-under-section-80d.aspx

https://www.incometaxindia.gov.in/Pages/tools/deduction-under-section-80dd.aspx

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.