How Much Should One Invest In Elss To Save Tax?

By Author: Shashank Pawar
Total Articles: 13
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Before talking about how much one should invest in ELSS or Equity Linked Saving Scheme, let us first understand the meaning of ELSS Mutual Funds.

What is an ELSS Mutual Fund?
When it comes to tax saving Mutual Funds, ELSS is trusted by many investors. As the name suggests, an ELSS fund is an equity-oriented scheme, hence it maintains a portfolio largely in the stocks.

ELSS investment allows an individual or HUF, a deduction from the total income up to ₹1.5 Lakhs under Sec 80C of the Income Tax Act 1961. They have a lock-in period of 3 years, which is the shortest lock-in period among all the 80C options. In other words, one cannot sell the units for 3 years from the date of purchase. However, there is no maximum tenure of investment. Hence, one must stay invested for as long as possible to optimize their potential for good returns.

Saving tax with ELSS investment should be a part of your overall financial planning, especially for young taxpayers.

How much should you invest?
You ...
... can start investing in ELSS Fund with an amount as low as Rs. 500 through SIP. Later, you can increase the investment amount as per your convenience, time horizon and goal.

If you are someone who is new to investing and do not understand how ELSS works or how much you need to invest to save taxes, you can use an online ELSS calculator which might come in handy. One can save taxes up to Rs. 46,800* by investing in ELSS Mutual Funds. *However, this amount may vary slightly under different plans.

Also, once the lock-in period of 3 years is finished, you have the option of either redeeming your ELSS investment fully or partially, depending on your requirements. However, the units that have not completed the mandatory lock-in period of three years, cannot be redeemed.

Tax on Mutual Funds
Before talking about tax on Mutual Funds, one must know that Mutual Funds provide earnings in two forms- Capital Gains and Dividends. On one hand, a capital gain is taxable and paid by the investors whereas on the other hand, tax on Mutual Funds dividends i.e., Dividend Distribution Tax (DDT) is paid by the fund house (Asset Management Company) on behalf of the investors.

Capital Gains
Capital gains are a tax on mutual funds, which is paid on the profit you make while redeeming our Mutual Fund holdings. Your capital gains remain tax-free up to ₹ 1 lakh.
Capital Gain = difference in Net Asset Value (NAV) of the scheme on the date of sale and date of purchase (Selling Price - Purchase Price).

Capital gains tax is further classified depending on the period of holding i.e., Long Term Capital Gain (LTCG) and Short-Term Capital Gain (STCG). Both LTCG and STCG vary for equity and non-equity (debt) funds.

DDT
Dividends from Mutual Fund schemes are another aspect of Mutual Fund taxation. Dividend Distribution Tax (DDT) is tax-free in the hands of the investor since it is deducted at the source. It is not calculated on the NAV, but on the percentage of the scheme’s face value.

DDT paid by the scheme reduces the distributable surplus available for the investors. Since dividends are distributed out of the profit made by a scheme, a higher DDT reduces the post-tax dividend available to investors.