ELSS Tax Benefits and Taxation of ELSS Funds

In this article we cover

• 1) Taxation of ELSS Funds

• 2) Mistakes made while investing in tax saving instrument

• 3) Mistakes made while investing in ELSS Mutual Funds

• 4) Whats are the ELSS Tax Benefits Offered by ELSS Funds?

Taxation of ELSS Funds

ELSS mutual funds are the most favoured option when it comes to efficient and effective tax saving instruments. This is because of the exemplary dual benefits it offers of saving investor’s tax and creating wealth for them simultaneously. Here, we shall learn about the common mistakes investors make while investing in tax saving instruments and how ELSS mutual funds offer the best tax benefits.

ELSS mutual funds have a good exposure to equity markets as about 80% of its investible corpus is invested in direct equity and equity related instruments. Equity funds Equity funds
Equity mutual funds are mutual funds that primarily invest in equities (stocks) of various companies across market capitalization in an attempt to generate high returns. Hence equity funds are also called as stock funds.Read More has a great potential to earn impressive returns due to its investment made in the shares of companies.

As per the Section 80C of the Income Tax (IT) Act provision, ELSS mutual funds qualify for a tax deduction of up to ₹1.5 lakhs.

But there are certain mistakes that investors make while parking their funds in tax saving instruments. Here are a few mistakes that investors need to know.

Highlighting mistakes that investors make

• Mistakes made while investing in tax saving instrument
• Mistakes made while investing in ELSS mutual funds

Mistakes made while investing in tax saving instrument

Late planning of investment in ELSS Funds

Most people wait till March to save tax and hence they rush straight to their banks and do tax filing at the 11th hour. Due to this, such people miss out on the opportunity of investing in the best tax saving instrument. This is because they don’t get time to research about the best tax saving funds and invest in some tax saving instrument for the sake of it.

Investing in ELSS funds without proper research

Investors mostly come with a sole and narrow vision of saving their tax and hence neglect other factors like risk and returns. Due to this inadequate research that is due to the perspective of only saving tax, investors end up investing in the wrong tax saving scheme.

Not knowing the basics of investing in ELSS funds

Before investing in a tax saving scheme, investors should know certain basics of investing like analysing their risk profile and their investment objective. Failing to realise this can lead them to invest in the wrong tax saving instrument since it may not serve the investor’s purpose.

Not realising the full potential of ELSS tax saving instruments

Even if investors try to research and understand all tax saving instruments, they lack understanding complex aspects of these instruments which may lead them to invest in the wrong instrument. Hence, investors should carefully analyse each and every aspect of a tax saving instrument.

Mistakes made while investing in ELSS mutual funds

Not knowing the category of ELSS mutual funds

ELSS mutual funds are based on the market capitalisation category like large cap, mid cap and small cap. Hence, the risk and returns in it may also vary. Investors are advised to look for the category as well and comprehend your risk taking ability and invest accordingly in ELSS mutual funds.

Timing the market

Markets are characterised by uncertainty hence, timing the market should certainly be off the checklist. Markets may swing to the extremes and hence it is always advisable to invest when you want to invest.

Redeeming immediately after the lock-in period

Investors in a hurry, most often withdraw their investment at the end of the lock-in period. Equity carries the essence of wealth compounding and hence it is advisable to stay invested for the long term so that you accumulate a huge corpus and get the dual benefits of ELSS mutual funds.

What Are the ELSS Tax Benefits Offered by ELSS Funds?

Here are the ELSS tax benefits offered by ELSS mutual funds:

1. ELSS mutual funds are subject to a lock-in period of 3 years and qualify for a tax deduction of up to ₹1.5 lakhs.
2. Maximum potential of this tax saving scheme is ₹46,800 p.a.
3. Since, ELSS funds majorly invest in equity schemes, long term capital gains (LTCG) tax is levied at only 10% for gains above ₹1 lakh.
4. There is no tax levied for returns on investment of below ₹1 lakh in the long term for ELSS mutual funds.

Read a detailed article about the advantages & disadvantages of ELSS mutual funds to get a better understanding.

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