How to invest in ELSS MF schemes to save tax | Economic Times

If you are looking for a tax-saving instrument that offers the shortest lock-in, then you can consider investing in equity-linked savings scheme (ELSS) mutual funds. By investing in ELSS, an individual can claim a deduction from his/her gross total income of up to Rs 1.5 lakh under section 80C of the Income-tax Act, 1961.ELSS are equity-oriented mutual fund schemes, therefore, comes with higher risk and volatility as compared to a tax-saving fixed deposit. Do keep in mind that unlike tax-saving FDs whose returns are known at the time of investment, returns from ELSS are market performance-based.From FY 2020-21, an individual can choose between the old tax regime and a new tax regime. In the old tax regime, an individual can continue to avail of the existing tax exemptions and deductions. On the other hand, a new tax regime offers a lower, concessional tax regime without any tax exemptions and deductions. The tax breaks that will be forgone under the new tax regime will be Section 80C, Section 80D, Section 80TTA etc.Also Read: Which tax regime is beneficial for you? Also Read: Your complete guide on tax-savingsInvestment amountMost fund houses allow individuals to start with a minimum investment of Rs 500. Though there is no maximum limit on the investment amount, a tax break can be availed for a maximum of Rs 1.5 lakh under section 80C in a financial year. The investment in ELSS mutual fund schemes can be done either as a lump sum or via monthly systematic investment plans (SIP).By investing Rs 1.5 lakh in a financial year in an ELSS, an individual taxpayer in the highest tax bracket can save tax of Rs 46,800 (inclusive of cess at 4%).How to invest in ELSSTo invest in an ELSS, an individual must be KYC compliant. The investment can be made by visiting the fund house's branch office or the registrar office with a duly filled physical form along with a cheque. One can also start investing online via the fund house's website or aggregators. Once the investment is made, a folio number is allotted to the individual. Future investments in the ELSS scheme can be made by mentioning the same folio number of the same mutual fund house. While investing in ELSS mutual funds, the investor has the option to choose between any one of the following options: (i) Growth option, (ii) Dividend option and (iii) Dividend Reinvestment option. Under the growth option, dividends are not paid to the investor. The gains/losses are realised at the time of redemption or switch. In the case of the dividend option, the investor gets the dividend amount. However, a declaration of the dividend is wholly decided by the fund house. Do keep in mind that the dividend received by you is fully taxable in your hands. Under the dividend reinvestment option, the dividend announced by the fund house will be reinvested in the scheme. The reinvestment of dividend will also have a lock-in period.Since ELSS is a market-linked scheme, where investment value changes every day, your investment into a mutual fund scheme will be allotted the NAV of the day on which funds are credited to the mutual fund's bank account and is available for utilisation by the AMC. NAV stands for Net Asset Value. It is the market value of the securities held by the scheme. LiquidityAs mentioned above, ELSS mutual fund schemes come with the shortest lock-in period of three years from the date of investment. No redemption or switch is allowed during the lock-in period. Once the lock-in period is over, redemption will be done using the First-In-First-Out (FIFO) method, in case of multiple investments.TaxationInvestments made in the ELSS mutual fund schemes offer tax break under section 80C. Once the lock-in period is over, any redemption or switch out made in the ELSS scheme will attract tax liability. As per the current tax laws, equity mutual funds held for more than one year will attract long-term capital gains tax. However, these gains are taxable at the rate of 10% without indexation benefit only if the gains exceed Rs 1 lakh in a financial year. Gains up to Rs 1 lakh are exempted from tax.