Tax Saver Mutual Funds: Rules, Plans, Tips

Chakshu Arora
Tax Professional

January 18, 2018

ELLSS’s that is Equity linked Saving Schemes often called the ‘first’ mutual fund scheme as most investors get into tax-saving mutual funds through in ELSSs qualify for tax deductions of up to Rs 1.5 lakh under The Income Tax Act, section 80C.

With the shortest mandatory lock-in period of three years among the tax-saving options available under Section 80C ELLSSs comes with may benefits..However; ELSSs are riskier than the government-sponsored schemes as they invest in stocks which are risky and volatile in the short-term. So, it is important to invest in ELSSs with a longer horizon than the mandatory three-year lock-in period to lessen the risk factor.

The ELSSs also reward investors for the extra risk.Like; ELSS category has offered tax-free returns of around 13.52% in three years, 17.29% in five years and 9.83% in the 10-year horizon.

Though one can invest in ELSSs through lump sum yet it is recommended to go through the Systematic Investment Plan (SIPs) that allows the investor to average one’s investment and save you from catching a market peak. Every individual SIP carries a lock-in of 3 years Each SIP is considered to be a fresh investment.

An ELSS investment can be started with a minimum lot of as low as Rs 500 and there is no upper limit to the investment. However, tax-saving can only be availed for a maximum of Rs 1.5 lakh a year.

Though ELSS have a lock-in period of three years yet one can stay invested in them, with or without further contributions as long as one wants. One can even stop an ELSS SIP at any point, but the invested amount can be withdrawn only after 3 years.

ELSS funds do not allow premature redemptions before completion of the 3-year lock-in period.

Individuals as well as HUFs can invest in them. Though NRIs can also invest in them, at present, most mutual fund companies do not accept investment from NRIs based in US and Canada.

ELSS funds have two plan options: growth and dividend. The growth option is recommended for long-term plan investment as under the dividend option, the investor can choose between dividend payout and dividend reinvestment. The dividend received is non-taxable. If dividend reinvestment is choose it is treated as a fresh investment and tax benefit can be claimed on it.

These mutual funds also offer nomination facilities and offer less risk to the invested amount as these are diversified.

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