A Quick Guide on How to Claim Tax Deductions on ELSS Investments

Equity-Linked Savings Schemes (ELSS) are diverse equity funds offered by the asset management companies (AMCs). A majority of the fund corpus is invested in equities and related products.

Tax exemptions on ELSS investments are available according to Section 80C of the Income Tax Act, 1961. The minimum lock-in period to avail of this benefit is three years. In addition to your principal being tax-exempt, the dividends and maturity proceeds are tax-free.

Section 80C tax exemptions

This section allows you to avail of tax deductions in eligible investments. The maximum deduction allowed is INR 1.5 lakh per annum. The investment products eligible for tax benefits under this section include Public Provident Fund (PPF), Fixed Deposits (FDs), ELSS funds, National Pension System (NPS), and others.

Why should you invest in ELSS funds?

Compared to other eligible investments, ELSS offers several benefits. Here are seven such advantages.

  1. Compared to PPF, FDs, and NPS, the lock-in period is the shortest for ELSS plans.
  2. Potential higher returns because of the equity exposure.
  3. Multiple options such as growth, dividend, and dividend reinvestment are available.
  4. Maturity proceeds on NPS are partially taxable. Similarly, interest on FDs is taxable. In comparison, the dividends and maturity proceeds from ELSS funds are tax-exempt.
  5. You may develop investment discipline with a Systematic Investment Plan (SIP).
  6. No Tax Deducted at Source (TDS) is applicable on dividend income earned from ELSS investments.
  7. At the time of redemption, you do not have to pay any capital gains tax.

How to claim tax benefits

  • Income tax returns

You may claim the tax benefit on your ELSS investment when you file your income tax return (ITR) for the financial year. You may have to show investment proof, therefore, retaining these documents is crucial.

  • Multiple holdings

You may be confused on how to save tax with ELSS funds especially if you invest through an SIP or invest in more than one plan. There is no limitation on the number of ELSS plans; you may invest to claim the section 80C tax benefits. However, you must be cautious because the maximum deduction is limited to INR 1.5 lakh per year. Therefore, if you invest more than this amount, the same is not eligible for tax benefits.

  • Investing with SIPs

A similar rule is applicable to your SIP investments. Whether you invest in one fund or multiple funds using the SIP route, the maximum deduction is limited to INR 1.5 lakh per annum. However, if you invest in SIPs, you need to remember an important factor. Every installment of the SIP is considered as a fresh investment. Therefore, the three-year lock-in period is applicable to each of your SIP installment.

  • Investing in new plans each year

Another common misunderstanding related to how to save tax with ELSS funds is that the benefits are available only if you invest in new plans every year. However, you do not have to invest in a new ELSS plan each year to avail of the tax benefits as per section 80C of the Income Tax Act. You may invest in the same scheme. However, if the fund you chose consistently underperforms, you may consider investing in a new ELSS plan.

Is it necessary to exit after the lock-in period?

You may also be under the misconception that you must exit your ELSS investments at the end of the compulsory lock-in period. However, this is not necessary and you may continue to stay invested at the end of the three-year lock-in period. Historically, ELSS plans have delivered higher returns when you retain your investments for a longer period between five and seven years. Therefore, if your chosen ELSS plans are doing well, it is advisable to retain your investments to maximize your benefits.

A large number of fund houses offer different types of ELSS plans. Making the right choice among these multiple options may be confusing. You need to evaluate the different options based on several factors such as past performance, investments included in the fund portfolio, risk profile, investment philosophy, and many more. You may have neither the experience nor the expertise to conduct a detailed analysis of the different ELSS plans.

All this work is done easily by ARQ the proprietary investment engine offered by Angel Wealth. A key highlight of Angel Wealth’s mobile application, this engine analyzes and evaluates all the different ELSS plans based on over a billion data points. These are then matched to your lifestyle, investment objectives, and risk appetite. You receive customized recommendations that are driven by scientific algorithms and quants, thereby eliminating all human bias and errors.

Author: Chakraborty

Dr Chakrabarty is the Chief Innovation Officer of IntuiComp TeraScience. Earlier she was Assistant Professor of Delhi University, a QS ranked university in India. Before that she has held research positions in IITs and IISc. She holds 2 patents and over 20 publications in her name. Her area of research is in smart technologies, integrated devices and communications. She also has a penchant for blogging and is an editor of Business Fundas.