Equity Linked Saving Schemes is a highly popular equity-oriented scheme that is also eligible for tax deductions under the Se 80C of the Income Tax Act, 1961. These mutual fund schemes come with a lock-in period of three years and highly suitable for investors looking for long-term returns. You have the option of investing in ELSS schemes in two ways- the first one being a Systematic Investment Plan or the SIP and the second is investing a lump sum amount.
How are ELSS and SIP Different?
So while tax-saving ELSS is a type of mutual fund, SIP is a method of investing in all types of mutual funds. The frequency of SIP can vary from a week to a month to a quarter or six monthly, as per your convenience. You also have the option of choosing the amount, subject to the minimum specified by the mutual fund company, for investment via SIP. This means you can choose the amount keeping in mind how much you can spare to invest every month or week or quarter and so on. A SIP is a good option if you are looking for disciplined investing.
ELSS schemes offer you the dual benefit of tax deduction and wealth accumulation over time. Their main features are:
- They are open-ended mutual fund schemes which means you can buy or sell them at any time (except during the first three years or the lock-in period). A SIP may involve investment in any kind of financial instrument whether equity or debt.
- These funds invest around 65% of their corpus in equity or equity-related instruments and the remaining funds are kept aside for investment in debt instruments.
- The tax saving on ELSS schemes is available only on investments of up to Rupees 1.5 lakh. However, the returns generated from these schemes are taxable beyond a certain limit under the dividend distribution tax or as taxes on long-term capital gains. SIP investments made only in the ELSS schemes are eligible for tax exemption under Section 80C.
- You can either choose the growth option wherein the profits earned on the investments are reinvested and repaid on maturity. However, if you choose the dividend option, the profits are distributed as dividends.
- You can invest in ELSS schemes via the SIP route which means you invest a pre-decided amount at fixed intervals. Each contribution is treated as a separate investment with the lock-in period applying to each instalment individually. A major benefit of investing via the SIP route is that you will benefit from the rupee cost averaging effect which means the price of buying equities or other instruments is low when the markets are down and high when the markets are up.
- You also have the option of making a lump sum investment in the ELSS schemes if you have surplus funds which you wish to invest in one go. It also makes sense when you are investing at the end of the financial year and wish to take the tax benefit of investing in an ELSS scheme.
You can choose to invest in an ELSS online via the SIP route or make a lump sum investment depending on your financial situation.
