With tax season nearing, all possible investment options are being searched by people which will enable them to avail maximum tax benefit. Investments under Section 80C of the Income Tax Act are the most widely sought instruments for saving tax. Amongst various instruments coming under this section, some offer attractively high returns while some bring comparatively lower returns. Returns can always be linked to the risk taking capacity of the investor. Higher the risk associated with an instrument, better are the potential returns.
One of the investment options under Section 80C which bears the potential to bring high returns is the Equity Linked Savings Scheme (ELSS). The term equity in the scheme is in itself an indicative of the instrument being linked to shares (stocks).
What is ELSS?
ELSS is a mutual fund (MF) scheme which is similar though not same as diversified equity funds of a MF. The scheme came into existence under the central government's guideline in the year 1992. It is different from a diversified equity fund in the sense that it has a lock in period of 3 years. Normal mutual funds are open ended without any lock in period.
Features of ELSS
• Units in this scheme are offered at NAV (net asset value) of the underlying asset. The NAV is dependant on the price of the asset (shares) and thus is subject to fluctuate daily.
• It has a lock in period of three years. This means the fund cannot be withdrawn during the first three years. After three years the fund starts behaving as a normal open ended mutual fund.
•Usually majority (80%) of the investment in ELSS is done in equity. The small remainder is invested either in debt instruments, money market instruments or even equity in entirety. This depends on the risk potential of the investor.
•Returns from this instrument are not taxable under Income Tax Act of the government. Also dividend earned is tax exempted.