Equity Linked Savings Scheme (ELSS) is a tax saving scheme that comes with a lock-in period of three years and tax benefits. This tax saving scheme can be availed by both salaried professionals as well as businessmen to avail hassle free tax exemptions. ELSS is one of the many other tax saving schemes under Section 80C of the Indian Income Tax Act, 1961, where one can invest and get tax exemption up to Rs. 1.5 lakh per financial year. ELSS is probably the only equity mutual fund scheme that comes with tax benefits. Also, the lock-in of three years is probably the shortest among other tax saving instruments covered under section 80C.

Here is an example to help you understand how ELSS works –

Ramesh Shah is the branch manager of an audio company whose annual income is Rs. 1.4 million. This takes them to the highest tax slab. learns about ramesh
ELSS and decided to invest Rs. 1.5 lakh in this. As per Section 80C of the Indian Income Tax Act, 1961, investment up to Rs. 1.5 lakhs made in the ELSS scheme are eligible for tax benefits. So, by investing Rs. 1.5 lakh in ELSS Ramesh managed to bring his gross taxable income to Rs. 12.5 lakhs. Also, since ELSS is an equity mutual fund scheme, the lock in period of 3 years can help Ramesh earn some interest on the investment amount.

What is a Systematic Investment Plan?

A systematic investment plan, often referred to as a SIP, is an easy and convenient way to invest in mutual funds like ELSS. SIP allows investors to invest a fixed amount at regular intervals in an ELSS scheme of their choice. SIP is ideal for those who do not have the resources or do not want to invest lumpsum in ELSS funds. Investors can choose a convenient amount to invest in ELSS from time to time (usually every month) and continue investing this amount till their investment objective is achieved. However, the SIP amount that an investor decides cannot be less than the minimum investment amount mentioned in the SID (Scheme Information Document).

A KYC compliant person can easily invest in ELSS funds through SIP using a laptop/smartphone and good internet connection at his/her home or office. A person has to decide only about monthly
sip Do the sum and instruct your bank to allow auto-debit. After which, the SIP amount will be deducted from the investor’s savings account on a predetermined date every month and electronically transferred to their ELSS portfolio.

Benefits of investing in ELSS through SIP

Here are some of the primary benefits that you can avail for starting a monthly SIP in an ELSS plan –

Power of Compounding – In the context of mutual funds, compounding refers to the interest earned on the interest earned from the initial investment amount. When the amount you invest earns interest, and when that interest starts accumulating interest of its own, it is known as the power of compounding. An investor can benefit from compounding if he continues to invest in ELSS funds through SIP for a longer period.

Rupee Average Cost – As the SIP amount remains constant, the allocation of units may vary depending on the fluctuating NAV. When the NAV of an ELSS scheme is low, more units are allotted and vice versa. This adjustment is referred to as rupee cost averaging and investors may get more units given the volatile equity markets.

Starting SIP in ELSS scheme can be a good option to save tax and generate long term wealth. However, it is necessary to determine one’s risk appetite before investing in highly volatile equity oriented schemes.