What is ELSS? How to invest in ELSS?

What is ELSS? How to invest in ELSS?

by 5paisa Research Team Last Updated: Mar 20, 2023 - 11:35 am 155.7k Views
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An equity-linked savings scheme or ELSS is an investment that draws its returns from the equity-linked markets. ELSS offer the double benefits of tax saving and wealth growth for investors but have a mandatory lock-in period of three years. An investor can save up to Rs1.5 lakh under Section 80C of the Income Tax Act, 1961, through investments in ELSS.

ELSS funds have two types of investment methods, namely Growth and Dividend payout option.

Growth Option: Through this route, the investor can redeem their investment amount along with the returns at the end of the three-year lock-in period.

Dividend Option: Through this route, the investor can receive dividend payouts during the period of the investment. The investor also has the option to reinvest the dividend, which then would be treated as a fresh investment and would also avail the benefits of tax deduction.

To start investing in an ELSS, the investor can infuse a lumpsum amount as a one-time investment or spread their investment over a year by way of a Systematic Investment Plan (SIP), where a pre-specified amount is invested monthly or quarterly. The monthly SIP option is the most popular method of investment.

ELSS are available in two investment formats:

1. Open-ended ELSS Funds

Open-ended ELSS funds are the most common type of funds available for Indian investors and are suitable for new investors as well. The investor can redeem the investment after the mandatory lock-in period of three years.

2. Close-ended ELSS Funds

These funds are only available during the New Fund Offer (NFO) period. However, the investor could have to stay invested in the fund beyond the compulsory lock-in period of three years. The condition of close-ended ELSS funds is that the offer for a longer investment period should not be offered after the NFO has closed.

Ways of Investing in ELSS

With the growth of technology, investing in ELSS funds has become a very quick and easy process. Moreover, one can start investing in ELSS funds with a minimum investment of Rs500.

An individual has two modes of securing an ELSS investment:

Offline Method

In the offline method, the investor has to be present at the fund house to open an ELSS account. The most commonly required documentation for ELSS funds are:

  1. Know Your Customer (KYC) documents like Aadhaar, PAN, etc.
  2. Post-dated cheques favoring the mutual fund scheme
  3. Complete application form/bank mandate
  4. Other documents as required by that specific mutual fund scheme.

Online Method

The investor opting for the online process has to complete an Aadhaar-based KYC through an authorized channel. Upon completion of the registration process, the investor will receive a pre-filled bank mandate and an email from the National Stock Exchange (NSE).

Investing in ELSS requires the investor to confirm their FATCA details. FATCA stands for Foreign Account Tax Compliance Act, a tax initiative by the US that requires all financial institutions, including Indian mutual funds, to report their financial transactions with US citizens.

As the Government of India and the US have agreed on an Inter-Governmental Agreement, FATCA is now applicable to all Indian fund houses.

Investing in ELSS funds is a very easy and transparent process. ELSS is also a very effective tax-saving instrument. It is an obvious option for risk-tolerant investors and those who have just begun on their financial journey. ELSS funds have the ability to generate considerable returns when compared to other asset classes.

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