Closing date for tax saving is near
In the context of FY 2020-21, the last date of investment for tax savings has come to a close. It is 31 March 2021. If you are looking for the lowest lock-in period instrument for tax saving, then you can think about investing in Equity Linked Saving Schemes (ELSS) of mutual funds. You can claim deduction up to Rs 1.5 lakh under section 80C by investing in ELSS. ELSS schemes are also called tax saving funds.
Most of the funds raised from ELSS investors invest in equity and equity related securities. For this reason, they have higher volatility and risk than tax saving fixed deposits. It is to be noted here that in case of tax saving FD, the information about the return is available at the time of investment. At the same time, the performance of ELSS is related to the market.
Investment amount
Most fund houses allow people to start investing with an amount of at least 500 rupees. By the way, there is no maximum investment limit in tax saving funds. However, the tax exemption is only up to Rs 1.5 lakh. SIPs or outright investments can be made in ELSS funds. By investing Rs 1.5 lakh in ELSS, the person in the highest tax bracket can save Rs 46,800 (including 4% cess).
How to invest in ELSS?
In order to invest in ELSS, it is necessary for a person to go through the KYC process. In the branch office or registrar office of the fund house, you have to fill the form with a check. You can also invest online through the fund house website or aggregator. Once invested, you are allotted a folio number. By giving this folio number, one can invest in ELSS scheme in future.
When investing in tax saving mutual funds, investors have many options to choose from. These include growth option, dividend option and dividend reinvestment option.
In the growth option, investors are not paid a dividend. Gains / loss schemes are available only when redeeming or switching from it. In the dividend option, the investors pay the dividend. However, the declaration of dividend depends entirely on the fund house. It is important to note here that the dividend that you get is taxed. In the dividend reinvestment option, the dividend that the fund house announces is again invested in the scheme. The reinvestment of dividend also has a lock-in period.
ELSS is a market linked scheme. The value of investment in this varies every day. Your investment in a mutual fund is the NAV of the day in which the money is credited to the bank account of the mutual fund.
How is the liquidity?
ELSS funds have a lock-in period of three years. This is the least of the options available under section 80C. You cannot withdraw money from the scheme during the lock-in period.
What are tax rules?
Tax exemption is available under section 80C on investments in ELSS funds. If you withdraw money from the scheme after the lock-in period is over, then it is taxed. According to current tax laws, holding equity funds for more than one year incurs long-term capital gains tax. However, this tax is levied at a rate of 10 per cent on gains of more than Rs 1 lakh. Gains up to 1 lakh rupees are not covered by tax.
