ELSS Myths Exposed
Financial Goals
ELSS Myths Exposed
- Myths are not facts
- Check for facts before investing
- Invest with confidence based on reality
Investing in ELSS (equity linked saving scheme) is surrounded with myths and legends, and for years, many people have been confused and mistaken about them. We will take the mystery out of understanding ELSS by dispelling some popular myths.
Myth1: ELSS needs redemption after the 3-year lock-in
The Reality: It is a well-known fact that among tax saving options under the Section 80C benefits of the Income Tax, ELSS stand out for its shortest lock-in of 3 years. However, unlike some other instruments where at the end of the lock-in the investments need to be redeemed, there is no such compulsion when investing in ELSS. Investments in ELSS can remain for as long as investors wish to retain them. One could use investments in ELSS for long-term financial goals as well which are well beyond the 3-year lock-in of the ELSS.
Myth2: You can’t invest above the Rs 1.5 lakh Section 80C limit
The Reality: There is a cap of Rs 1.5 lakh on the amount that a taxpayer can claim towards deduction under Section 80C of the Income Tax Act. However, there is no limit on how much one could invest in tax saving instrument in a financial year. The limit exists towards the amount that a taxpayer can claim towards deduction, as any additional amount does not qualify for tax deductions.
For instance, if one invests Rs 2 lakh in a financial year in an ELSS; the tax savings under Section 80C can be claimed only up to Rs 1.5 lakh; the additional Rs 50,000 will not qualify for tax deduction. However, this additional investment will be treated as any investment and not treated differently. What this means is that the additional investments will be treated equally with the same NAV as the investment which qualifies as the tax saver up to the Rs 1.5 lakh limit.
Myth3: Invest only lump sum in ELSS
The Reality: There is no compulsion to invest through only lump sum when investing in ELSS. Investors can adopt the SIP (systematic investment plan) or lump sum option when investing in ELSS as per their convenience and financial needs. The advantage of investing through ELSS in any type of mutual fund is well known. They are ideal for regular and disciplined investing, which is also the need when one wishes to save tax each year. The one reason why SIP investing through ELSS is often discouraged is because each SIP instalment needs to meet the 3 year lock-in when one invests through this option.
Myth4: Lock-in starts from the date of registration of SIP
The Reality: There is convenience to invest through SIPs in an ELSS to make tax savings a regular and round the year exercise than rush towards end of the financial year. With Rs 12,500 monthly SIP you can plan your tax savings from the beginning of the financial year to exhaust the entire Rs 1.5 lakh Section 80C limit. Many investors assume that the lock-in when investing through SIPs in ELSS is from the date of the first SIP registration, which is not true. In case of investing through SIPs in an ELSS; each SIP instalment is locked in for a period of 3 years, making each SIP instalment have a different completion of the lock-in.
Myth5: All ELSS funds are the same
The Reality: Several tax saving instruments are identical in the benefits they offer. For instance the tax saving bank deposit or PPF has the same interest rate to the tax saving contribution irrespective of the bank or post office that one chooses to invest in such instruments. In contrast, ELSS needs to follow the prescribed investment guideline under Section 80C of the Income Tax Act, 1961. So, investment in ELSS has a minimum 80% equity exposure that could technically go up to as much as 100%. But, the choice of how an ELSS mutual fund is managed is left to the fund manager and the AMC.
What this means for investors is that the performance of ELSS varies across AMCs and they have a choice to select an ELSS. As every AMC and fund manager has their way to manage an ELSS, the performance of the ELSS varies. Tax savers can analyse the past performance and track record of the AMC when choosing an ELSS to invest in to claim tax deductions under Section 80C of the Income Tax Act.
Next steps
- Check how much you need to save tax
- Analyse the performance of ELSS
- Start investing in ELSS