Know The Benefits of Investing in ELSS Through SIP

Did you know that some individuals only invest so that they can save taxes? This means that they still don’t realize the importance of investing and only invest so that they can bring down their tax liabilities. The truth is, tax planning should be a part of financial planning. The first step of financial planning is understanding your short term and long term goals. When you know your short term and long term goals, investment planning becomes a bit easier. 

The investment market is flooded with a plethora of investment products to choose from. However, along with determining their long term and short term and long term goals, investors are also expected to understand their risk appetite. For example, if you have a long term investment horizon and wish to build a retirement corpus for your sunset years you may need to look out for an investment scheme that holds the potential to help you achieve what you seek.

However, if you are someone with a moderately high risk appetite who wants to save taxes and at the same time seeks market linked returns, you may consider investing in Equity Linked Saving Scheme.

If you wish to find out more about ELSS, continue reading.

What is an Equity Linked Saving Scheme?

ELSS is an open ended mutual fund scheme that comes with a statutory lock in of three years. As of now, ELSS is the only mutual fund scheme that is eligible for a tax benefit. A three year lock in means you cannot redeem or withdraw your ELSS fund units till the three year tenure is over. And if you do, you may be penalized by the fund house for prematurely withdrawing the ELSS fund units. One good thing about ELSS is that this tax saver fund has a short lock in period. As per Section 80C of the Indian Income Tax Act, 1961 you can invest up to Rs. 1.5 lakhs* per fiscal year and claim tax benefits for the same.

Here is an example to help you understand how ELSS works:

Sujoy Binoy, a team leader with a call center earns taxable income of Rs. 13 lakhs per annum. This makes Sujoy fall in the 30 percent tax slab. Sujoy learns from a colleague about the tax saving scheme i.e. ELSS and decides to invest Rs. 1.5 lakhs in it. This way, Sujoy’s gross taxable income has come down to Rs. 11.5 lakhs and he has managed to bring down his overall tax liability by investing in ELSS.

How to make an investment in ELSS?

Generally fund houses offer two payment options for ELSS fund investors - you can either make a lumpsum investment or you can start a Systematic Investment Plan (SIP). Whether you should make a lumpsum payment or start an ELSS fund SIP might totally depend on your investment objective. If you are investing in an ELSS fund at the end of the tax season, you may have to make a lumpsum investment to save some taxes. However, if you want to give your ELSS investments a systematic approach, you may opt for an SIP instead.

Are there any benefits for investing in an ELSS fund via SIP?

Before we move on to understanding the pros of starting a SIP in the tax saver fund, let us understand what SIP is. Systematic Investment Plan or SIP is a mode of investing in ELSS or any mutual fund. All you have to do is instruct your bank and every month on a predetermined date, a fixed amount is debited from your savings account and electronically transferred to the ELSS fund. If you are a KYC compliant individual, you may even start a SIP in ELSS from the comfort of your laptop or smartphone with a decent internet connection.

Here are some of the reasons how investors who start an SIP in ELSS funds may benefit from the same:

SIP allows rupee cost averaging. This means if the NAV of the ELSS fund is low, investors will be allotted more number of units. On the other hand, if the ELSS fund’s NAV becomes high, investors will be allotted a lesser number of units. Also, if you start a SIP and keep investing in ELSS funds for the long run, you may benefit from a powerful tool like compounding. In the long run, compounding holds the power of transforming small investment amounts into decent corpuses. You may continue investing in ELSS funds via SIP till your investment objective is achieved. ELSS can be clubbed with an investor’s long term financial goals like retirement planning. Investing in an ELSS fund via SIP may inculcate the discipline of investing regularly.

These are some of the benefits of investing in ELSS through SIP. However, if you feel that you need further assistance in making an informed decision, do seek the help of a financial advisor.

*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.

Finance Act, 2020 has announced a new tax regime giving taxpayers an option to pay taxes at a concessional rate (new slab rates) from FY 2020-21 onwards. Any individual/ HUF opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions. Since, individuals/ HUF opting for the new tax regime are not eligible for Chapter VI-A deductions, the investment in ELSS Funds cannot be claimed as deduction from the total income.

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.