While making investment choices, tax implications play a crucial role. If you are not careful with your investment decision, the taxes can erode your returns. Sometimes, the primary purpose of investments is tax savings. In that case, you must explore Equity Linked Savings Schemes (ELSS) that build wealth and provide tax savings.
In this blog, we will explain how ELSS funds help with tax saving and give you the ELSS mutual funds list that are more likely to be profitable for 2024.
ELSS Funds Overview
Generally, equity funds incur taxation and are not deductible. However, ELSS funds can be claimed under Section 80C for tax deductions. Also, these ELSS funds invest in equity investments, providing a huge potential for capital appreciation. The catch with ELSS funds is that there is a 3-year lock-in period. Higher returns and tax savings are attractive features of ELSS funds, but the lock-in period means that you can’t expect to use the money for anything else within the time period. So, investing in ELSS funds is ideal for your medium and long-term investment goals.
About 80% of investments are done in equity assets. Generally, fund managers managing the ELSS scheme will invest in stocks of listed companies. Stocks from different types of small, medium, and large-cap companies are chosen for ELSS mutual funds. These diversified investments provide a higher potential for capital appreciation in the future. The success of these funds depends on the ability of the fund manager to conduct in-depth market research to identify profitable stocks.
ELSS Funds Features
Some of the features that make ELSS funds attractive for investors are:
- Lock-in Period – Minimum lock-in period of 3 years.
- Equity exposure – About 80% of the investment is made in equity assets.
- Tax saving – Claim tax deduction of up to Rs. 1.5 lakh under Section 80C with ELSS.
- Market-linked returns – As equity investments are market-linked assets, you will get returns based on market performance.
- Portfolio diversification – ELSS funds offer excellent portfolio diversification by allowing you to capitalize on the equity market. The fund manager invests in equities across different sectors, diluting the risk concentration.
Tax Advantage of ELSS Funds
According to Section 80C of the Income Tax Act, you can claim tax deductions of up to Rs. 1.5 lakh for eligible investments. ELSS investments are eligible for tax deduction under this category. This means that you can invest Rs. 1.5 lakh of your taxable income in ELSS funds and save up to Rs. 46,800 per year in taxes.
You cannot, however, redeem this fund within 3 years. Your investment will be locked in the funds for at least 3 years. Redeeming ELSS funds after 3 years is considered a long-term gain from equity investments. So, it is taxed at 10% if the gain is more than Rs. 1 lakh. If the gain is less than Rs. 1 lakh, it is exempt from tax.
So, with ELSS, you can get tax benefits in two ways. You can claim a tax deduction for the money invested in ELSS and enjoy tax exemption if the gain falls below the threshold value of Rs. 1 lakh.
Compared to other tax-saving schemes like the Public Provident Fund (PPF), National Savings Certificate (NSC), National Pension System (NPS), and fixed deposits, ELSS is better as it has the shortest lock-in period. Also, it offers better returns because of its market dependency.
Points to Remember Before Investing in the Top ELSS Mutual Funds
ELSS funds are not meant for short-term investors. Even though money is invested in equities, there is no need to worry about market volatility because the funds fare better in the medium to long term. You can continue investing in ELSS even after the lock-in period to enjoy equity returns. Some of the points to remember while investing in ELSS mutual funds are:
- Study fund performance and evaluate how well it performs against the benchmark. Funds that consistently beat the benchmark can also be expected to perform well in the future.
- The fund house that you invest in should have a long-standing history of at least five to ten years.
- Your fund house charges the expense ratio for fund-related operations. Higher expense ratios will reduce your take-home returns.
- Ensure that the fund manager is experienced and has a good reputation in the industry for successfully managing different types of mutual funds.
- You can invest in ELSS as a lumpsum investment or a Systematic Investment Plan (SIP). Explore both options to find the right choice for you.
Best ELSS Mutual Funds List
Here is the list of the best ELSS mutual funds expected to perform better in 2024.
| Fund Name | 10 Y Returns |
| Quant tax plan | 25.25% |
| Bank of India tax advantage fund | 19.10% |
| Bandhan ELSS tax saver fund | 19.03% |
| DSP tax saver fund | 18.84 |
| JM ELSS tax saver fund | 18.75% |
| Kotak ELSS tax saver fund | 18.63% |
| Invesco India ELSS tax saver fund | 18.29% |
| Canara Robeco ELSS tax saver fund | 17.26% |
| SBI long-term equity fund | 16.87% |
Conclusion
Top ELSS mutual funds with a higher return potential carry higher risk because they invest more in equity assets than fixed-income securities. Choosing funds based on the return performance alone is not ideal. Ensure that the fund house you deal with is reliable, and thoroughly research the fund manager. With mutual funds, the returns you gain depend on the efficiency of the fund manager to make the right investment decisions at the right time in the equity market. From a long-term perspective, ELSS funds are an excellent choice for wealth building and tax saving for salaried individuals in India.
FAQs
With ELSS mutual funds, a majority of the investment is made in the equity market. So, they carry a higher risk. However, the lock-in period of 3 years dilutes this risk because market volatility significantly impacts short-term investments only.
ELSS mutual funds offer limited liquidity due to the 3-year lock-in period. Once invested, you cannot redeem the mutual funds until the end of the lock-in period. However, these offer excellent portfolio diversification.
Yes, if you have invested in ELSS, you are eligible for tax deductions. However, the maximum deduction allowed under Section 80C is Rs. 1.5 lakh, which includes both PPF and ELSS investments. There are no tax benefits for the surplus amount.
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.