7 things to know about investing in ELSS

Section 80C of the Income Tax Act allows for a deduction of up to Rs 1.5 lakh from an assessee’s taxable income if the assessee invests in any of the instruments mentioned under this section.

There are various instruments that can avail the benefits of Section 80C, like, Public Provident Funds (PPF), National Savings Certificates (NSC), Fixed Deposits (FD) and the latest, fast-growing Equity Linked Saving Schemes (ELSS).

The 2019 Union Budget has done a lot in terms of tax relief to encourage investment. An annual taxable income of up to Rs 5 lakh no longer carries any tax liability. Standard deduction also has been increased from Rs 40,000 to Rs 50,000.

As investors can reduce their taxable income by up to Rs 1.5 lakh by making investments in instruments under Section 80C an additional Rs 50,000 into NPS, even individuals with annual incomes of up to Rs 7.50 lakh can possibly nullify their tax liability.

Proof of Identity (KYC)

Any investment in mutual funds requires the investor to be KYC compliant, this stands true for ELSS as well. It is mandatory for the investor to provide a proof of address and proof of identity, an in-person verification also has to be completed before investment.

Form Submission

Investments in ELSS can be made directly through Asset Management Companies or Mutual Fund houses or indirectly through a broker, bank or mutual fund advisor.

An investment application form can be obtained from the AMC or can be downloaded from the mutual fund house website. This form needs to be filled out and submitted to the mutual fund company.

Amount

Investments in ELSS can be as low as Rs 500 and there is no upper limit to investment. Even though there is no upper limit to investment, a maximum deduction of Rs 1.5 lakh will be available on the investor’s income.

Investment Methods

Investors can invest in an ELSS through either a lump sum investment or through a Systematic Investment Plan (SIP). A SIP deducts a predetermined amount from the investor’s bank account periodically to invest in an ELSS.

Statement of Account

After an investment is made in an ELSS, the Asset Management Company sends the investor a Statement of Account to verify that the investment has been made. The Statement of Account can be used as Proof of Investment for taxation purposes.

Lock-in Period

An ELSS comes with a minimum 3-year lock-in period and the amount invested cannot be withdrawn or transferred during this time. If an investor invests through SIP in ELSS they can stop the SIP at any time and the units purchased will mature three years from the date of purchase. So if an investor makes an investment in three instalments through SIP in January, February, and March 2018, the units will mature in January, February, and March of 2021 respectively.

Taxation

A maximum deduction of up to Rs 1.5 lakh from the investors’ income is allowed for investments in ELSS. During redemption, long-term capital gains will be taxed as prescribed in the Income Tax Act at 10%.

(The writer is Co-Founder and COO, Piggy, a Mutual Fund Investment App)