5 tips to invest in ELSS funds and get tax benefits

Equity Linked Saving Scheme (ELSS) is quite popular among mutual fund investors as it not only allows them attractive returns through portfolio diversification, it also offers tax benefits. The investments which you do in an ELSS scheme are allowed as a deduction from your taxable income under Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to INR 1.5 lakhs and save taxes up to INR 45,000 (assuming you are in the 30% tax slab rate) by investing in ELSS schemes.

This tax-saving benefit of the ELSS scheme makes the scheme more attractive. If you are also thinking of investing in the ELSS scheme for saving taxes, here are five tips for you to get the maximum benefits out of your investment –

Tip #1 – Compare and choose the best ELSS fund

All fund houses offer an ELSS scheme for their customers. As such, there are multiple ELSS funds that you can choose to invest in. Thus, before investing, you should compare the available ELSS funds and then choose one which offers the best and the most consistent returns in its class. There are an online website and mobile applications which allow you to compare and buy ELSS mutual funds online. So, choose such websites and applications to compare the different types of ELSS funds and then choose the best one.

Tip #2 – Choose direct schemes

ELSS mutual funds can be offered as direct plans or regular plans. Direct plans are those which are sold directly by the fund house and do not include brokerage payable to a middleman. Regular funds, on the other hand, include brokerage payable to the broker. As a result, the expense ratio of direct funds is lower than regular funds. A lower expense ratio results in higher returns and that is why direct plans of ELSS mutual funds are recommended.

Tip #3 – Invest through SIPs

When investing in ELSS mutual funds, you can choose to invest in one lump sum or in installments through SIPs. SIP investments are better as they allow you the benefit of rupee cost averaging. When you choose to invest through SIPs, the effective NAV of buying the units averages out and you don’t have to time the market. Moreover, SIPs are more affordable and allow you to inculcate a regular saving habit to build up a considerable corpus over time.

Tip #4 – Understand the tax implication

Most of you know that investments into ELSS schemes qualify for tax deduction under Section 80C. However, from the financial year 2020-21, the new tax regime has been introduced by the Government. This regime offers lower tax slab rates but the deductions are disallowed. So, if you choose to calculate your tax liability under the new regime, keep in mind that the deduction under Section 80C would not be available on your ELSS investments. Moreover, the returns earned from ELSS investments would be taxed @10% if they are more than INR 1 lakh. So, keep the tax implication of investment and redemption of the ELSS mutual fund in mind when you buy ELSS mutual funds online.

Tip #5 – Don’t delay your investments

Many investors have the habit of delaying their investments until the end of the financial year when they plan their taxes. This is a mistake. When you delay your investments until the last possible minute, you might either miss the tax-saving deadline or invest in a bullish market when the NAV is very high. Both of these situations are bad and should be avoided. You should not, therefore, delay your ELSS investments. You can create a SIP from the start of the financial year or invest in a lump sum when the markets are falling to get the benefit of lower NAVs and higher unit allocations.

ELSS mutual funds can help you maximize your wealth and get tax benefits if you are a smart investor. So, use the above-mentioned tips of investing in ELSS funds and maximize the benefits of your investments.

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