Understanding how it works
Mutual funds combine investor capital and utilize it to purchase stocks, bonds, and other securities. The performance of the securities the mutual fund business purchases determines its worth. Investing in stocks or shares is not the same as investing in mutual funds. Investors who purchase mutual funds do not have the same voting rights as those who purchase shares. In reality, you are purchasing the mutual fund's portfolio or a portion of its value when you purchase a unit. For this reason, the net asset value (NAV) of a mutual fund unit equals its price.
The Securities and Exchange Board of India (SEBI) is principally responsible for regulating mutual funds in India. The RBI, Companies Act, Stock Exchange, Indian Trust Act, and Ministry of Finance all regulate mutual funds in addition to SEBI. [1]
Tax Saving Mutual Funds
Under Section 80C of the Income Tax Act, tax-saving mutual funds or Equity Linked Savings Schemes (ELSSs) assist you in reducing your income tax liabilities.[2]
How SIPs Help in Tax Saving?
Under Section 80 C Investing in Equity Linked Savings Scheme (ELSS) through systematic investment plan gives a deduction of Rs 1.5 lakh from your taxable income. You can save up to Rs 46,800 annually in taxes and receive a tax refund of up to Rs. 1,50,000. [3]
What is an ELSS Fund?
The only type of mutual fund that qualifies for tax deductions under section 80C is an equity-linked savings plan, or ELSS fund.
The majority of the assets in ELSS mutual funds [AN6] are allocated to equities and equity-linked investment . They might also be somewhat exposed to fixed-income securities. These funds have the shortest lock-in duration of any Section 80C investment, at just three years. [4]
What characteristics do ELSS funds have?
[4]
- The primary characteristics of ELSS mutual funds are as follows:
- Under Section 80C, they provide tax deductions of up to Rs 1,50,000 annually.
- Three years is the lock-in period for ELSS funds, and there are no provisions for an early withdrawal.
- There is no upper limit on the amount you can invest in ELSS, although different fund houses have different minimum investable amounts.
- The only tax-saving investment that has the ability to provide returns that outpace inflation is an ELSS fund.
- The two advantages of investing in ELSS funds are wealth creation and tax reductions.
What tax advantages do ELSS funds provide?
Under Section 80C of the Income Tax Act of 1961, ELSS mutual funds offer tax deductions of up to Rs 1,50,000 annually. You can save up to Rs 46,800 in taxes annually by doing this. However, note that your investments are locked-in for three years from the date of investment. [4]
How Can an ELSS Fund Investment Be Made?
There are several ways to invest in ELSS funds, including[5]:
- Online platforms for investing in mutual funds
- Using a demat account that already exists
- Registrars
- An Agent
Conclusion
Mutual funds that are tax-efficient, especially ELSS funds, offer a practical means of reducing taxes while building wealth over the long run. They are a good investment option because of their three-year lock-in duration and potential for competitive returns. SIP investments in ELSS improve systematic tax planning and financial discipline even more.
FAQs
What is ELSS?
According to Section 80C of the Income Tax Act of 1961, ELSS is an equity-linked savings system (ELSS) that mainly invests in equity, and can save taxes as it offer a tax deduction under Section 80C of the Income Tax Act, with a lock-in period of 3 years. [4]
Can I get my ELSS back after three years?
Yes, after a three-year lock-in period, investors are able to withdraw their investment from ELSS funds. [5]
To what extent are ELSS funds exposed?
At least 80% of ELSS's capital is allocated to equity or equity linked investments. [5]
How can I begin making ELSS investments?
Know your customer verification is a prerequisite for investing in ELSS. You must provide your PAN, a valid proof of address, and your photo in the format specified for this. It is important to know that your investment in ELSS will be locked in for three years after the date of investment. [4]
What income tax section does ELSS fall under?
In accordance with Section 80C of the Income Tax Act of 1961, ELSS mutual funds offer tax deductions. They are the only mutual fund kind that qualifies for a tax refund. [4]
ELSS SIP: What is it?
A mutual fund class known as an equity-linked savings scheme, or ELSS is tax-saving investment tool. By investing in ELSS you could get potential returns for your future financial goals.[4]
What distinguishes other mutual funds from ELSS?
An ELSS is primarily a tax-saving investment tool, however other mutual funds are not dedicated towards providing tax saving advantages. In accordance with Section 80C of the Income Tax Act of 1961, an ELSS is a mutual fund that provides tax deductions of up to Rs 1,50,000 annually under old tax regime.[4]
How can I determine whether a mutual fund is ELSS?
A mutual fund class known as an ELSS provides tax deductions in accordance with Section 80C of the Income Tax Act of 1961. You must look up the fund's details on the fund house's website to see whether or not it is an ELSS. The same details will be accessible on the website of the third party if you are investing through them.[4]
References:
1 https://cleartax.in/glossary/mutual-funds
2https://economictimes.indiatimes.com/mf/analysis/best-tax-saving-mutual-funds-or-elss-to-invest-in-january-2025/articleshow/117070949.cms
3 https://cleartax.in/s/sip#h22
4 https://cleartax.in/s/elss
5 https://groww.in/mutual-funds/equity-funds/elss-funds
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