1. What is an ELSS mutual fund?
ELSS mutual funds are a type of investment that combines both savings and investment in stocks, while also acting as a way to reduce your taxes. ELSS Mutual Funds invest at least 65% of the total fund’s assets in equity securities (stock). This offers you an opportunity to deduct your contributions to the fund from your taxable income each year under Section 80C of the Income Tax Act.
2. How much tax can I save with ELSS funds?
You can contribute a maximum of Rs. 1.5 lakhs to an ELSS mutual fund in a financial year and receive a tax deduction on that amount under Section 80C. Depending on the income tax bracket you fall into, this means you could save as much as Rs. 46,800 each year.
3. Why is ELSS better than other tax-saving options?
ELSS has a much shorter lock-in period than other types of tax-saving options, such as PPF, which has a lock-in period of 15 years. Moreover, ELSS invests primarily in equities (stocks), which historically have provided higher returns over the long term than fixed income tax-saving instruments.
4. Is it risky to invest in ELSS mutual funds?
ELSS mutual funds do carry some degree of market risk, due to their investments in stocks, and there will likely be fluctuations in returns in the short term. However, historical performance has shown that the equity markets have generally produced better long-term gains than the historical performance of other tax savings options.
5. Should I invest in ELSS through SIP or a lump sum?
Both options work well, but SIP is preferred by many investors. SIP allows you to invest small amounts regularly, reduces market timing risk, and helps build disciplined investing habits while still enjoying tax benefits.