7 Points to remember while Investing in Tax Saver Fund

As on 27th March 2020

During tax season, a lot of individuals rush towards investing in tax saving instruments at the last moment. But what they miss out on understanding is that tax planning should be made part of one’s financial planning and that you should allot a certain percentage of your monthly income to some tax saving scheme and invest in it regularly. But the problem is most young investors wait till the last moment and invest a lumpsum amount rather than giving their tax saving investments a systematic approach by regular investing.

If you are filing tax returns for the first time and left confused about how or where to invest your money, you might want to consider the option of investing in equity linked saving scheme, also known as ELSS. ELSS is the only mutual fund scheme that comes with a tax benefit. Although there are other tax saving instruments as well under Section 80C that allow tax exemptions for investments of up to Rs. 1.5 lakhs* per fiscal, there are certain things that make ELSS a more feasible tax saving investment choice.

Here are seven points to remember while investing in this tax saver fund:

1. ELSS comes with a predetermined lock-in

Unlike other equity mutual fund schemes that do not need any commitments, ELSS, on the other hand, comes with a statutory lock-in of three years. This means investors cannot withdraw or redeem their mutual fund investments for a minimum period of three years. A three year lock in might work in favor of investors as this phase allows ELSS investments to grow.

2. One can remain invested in ELSS for more than three years

As an investor, you have the choice of staying invested in your ELSS scheme even after the lock-in period. If the scheme is giving opportunity for capital appreciation, investors may hold onto their ELSS fund instead of withdrawing. Long term investments are supposed to beat market inflation, and hence, you can remain invested in the fund as long as it is giving you desired results.

3. ELSS has a tax benefit

Like we stated earlier, ELSS is the only mutual fund that comes with a tax benefit. An investor can invest up to Rs. 1.5 lakhs per fiscal year in an ELSS scheme and claim tax deductions for the same. For example, if you are earning 12 lakhs per annum and being taxed for the same amount, you can invest up to Rs. 1.5 lakhs in ELSS and bring your gross taxable income to Rs. 10.5 lakhs.

4. ELSS can be considered as long term investment

Remember that you might be filing tax returns for the first time, but you have to continue doing so till you retire. Hence, a tax saving scheme like ELSS can be considered for meeting long term financial goals like building a retirement corpus. That’s because equity-oriented investments tend to offer better results when invested for a more extended period. Hence, you may want to remain invested in your ELSS scheme for longer.

5. There is no upper limit for ELSS investments

If you wish, you can invest more than Rs. 1.5 lakhs in an ELSS fund, but you cannot claim for tax deductions more than the aforementioned amount. There is no upper limit for investing in ELSS. However, as per Section 80C of the Indian Income Tax Act, 1961, a taxpayer cannot claim for deductions for more than Rs. 1.5 lakhs per fiscal year from their ELSS investments.

6. You can invest in ELSS via SIP or lumpsum

There two options offered by fund house for ELSS investments – SIP or lumpsum. If you have surplus cash parked and wish to put it to better use, you may opt for lumpsum investment. In lumpsum, an investor pays the entire ELSS investment amount at the beginning of the investment cycle and bags more number of units depending on the fund’s existing NAV or net asset value. But if you want to invest regularly and invest from compounding in the long run, you may opt for SIP investment. Systematic Investment Plan or SIP is an easy investment approach that allows ELSS holders to invest electronically. All one has to do is instruct their bank, and every month on a fixed date, a predetermined amount is debited from their bank account and transferred to the ELSS fund. You may continue investing in ELSS via SIP until your investment objective is met.

7. ELSS is available in growth and IDCW option

If you are investing in ELSS for income sake, you may opt for the IDCW option. Whenever the scheme makes profits, the fund manager rolls out bonuses to investors in the form of IDCW. However, IDCW distribution may occur solely at the discretion of the fund manager. But if you have a long term investment horizon and wish to build a corpus over the long run, you may opt for growth option. In growth options, the profits made by the ELSS scheme are reinvested in the fund. This may lead to an increase in the NAV of the fund in the long run.

If you are considering investing in ELSS to save taxes, you may take a look at Axis Long Term Equity Fund.

*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.

Axis Long Term Equity Fund

An open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit

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