ITR Filing Tips: Should you invest in ELSS mutual funds this income tax season?

Income tax-saving via ELSS under Section 80C: As the financial year draws to a close on March 31, 2024, it is that time of the year when income tax-payers make final adjustments to their income tax-saving investments. Accounting firms and professionals work hand and glove with their clients particularly during the last days of each financial year to ensure the maximum utilisation of the various deductions and tax benefits allowed to assessees under tax laws.

ELSS or equity-linked savings scheme is among a plethora of income tax-saving tools available today that enable income tax assesses to create wealth and save big on taxes at the same time under the old income tax regime.

Here is all you need to know about ELSS and how the income tax-saving instrument can benefit you:

What are equity-linked saving schemes or ELSS?

ELSS funds are diversified equity mutual fund schemes with at least 80 per cent of their portfolio invested in equities.

Four important features of ELSS

Exposure to equities spread across sectors: An ELSS fund invests at least 80 per of the corpus towards equities and that too not concentrated on a specific sector thus broadening the investor’s portfolio.

Lock-in period: ELSS schemes come with a three-year lock-in period. This is the period in which investors are not allowed to redeem their funds. However, the lock-in period associated with ELSS funds is the lowest among other tax-saving investment options such as PPF and five-year fixed deposits (FDs).

Tax saving: Being the only mutual fund category that qualifies for tax deduction under Section 80C of the Income Tax Act, ELSS funds are also popularly referred to as tax-saving mutual funds.

Inflation-beating return: As the instrument is invested into equities, it over a period of time, offers a return higher than inflation.

How can one save taxes and up to what quantum by investing in ELSS?

Misbah Baxamusa, CEO of NJ Wealth, said a taxpayer by investing up to Rs 1.5 lakh in the scheme can offer a tax deduction of up to Rs 46,800 under Section 80C each year, depending on the applicable tax slab under old tax regime.  However, if you have opted for the new tax regime, no tax benefit is available under the new regime for any investment instruments.

The instrument stands out among tax-saving avenues as it offers a lower lock-in period and offers other inherent benefits of mutual funds, such as flexibility, professional management and diversification, while creating wealth, Baxamusa pointed out.

Nevertheless, investors should not invest in the scheme solely for the purpose of saving taxes but should be considered from a long-term perspective, he added.

SIP or lumpsum route

While it is a personal preference, the SIP route enables an investor to be more disciplined in the market while mitigating the effect of market volatility on returns. The choice between SIP and lump sum should align with the investor's risk tolerance, financial goals, and market outlook by and large.

How to well manage the lock-in norm that comes inherent with the ELSS scheme?

Baxamusa is of the view that the lock-in period is a blessing in disguise. It is a known fact that equity is volatile; however, in the long run, the growth trend stabilises, and the volatility decreases, he added.

The lock-in this enables you wealth creation and also will do away with the need to pay short term capital gains tax.  And hence an investor will only be required to pay  long-term capital gains tax at 10 per cent on the gains exceeding Rs 1 lakh overall at the time of redemption.