Financial
Academy
I want to learn
- Equity
- Mutual Funds
- Commodities
How to invest in ELSS?
ELSS or Equity linked savings scheme is one of the best tax saving product available in the market, it has the lowest lock in, easy to redeem, managed by a profession and you can even do SIP with a starting amount of Rs. 500 per month. It’s always advisable to start saving for taxes as early as possible so that you can enjoy the power of compounding and have enough time to choose right fund. You can save upto Rs. 1,50,000 under section 80 C.
ELSS not only helps you to save taxes under section 80C but also help you use the same amount for your future needs. You should always link some goal to you investment.
Steps to Invest in ELSS
Once you have decided to save taxes via ELSS, now you much have questions like how to invest in ELSS or which is the best ELSS available in the market or what the steps to follow to invest in ELSS are.
Step 1: Determine your Tax slab and taxable income
It’s really important that you have a clear idea about your taxable income and tax slab. This will make clear that under which sections you can save taxes and which products are useful to you. You can refer the below table to check you tax bracket.
Tax Saving by Investing in ELSS (FY 2017-18)
| Income Tax Slab (INR) | Tax Rate | Max Tax Savings (INR) |
|---|---|---|
| 0 to 2,50,000 | No Tax | 0 |
| 2,50,001 to 5,00,000 | 5% | 0 - 7,500 |
| 5,00,001 to 10,00,000 | 20% | 7,500 - 30,000 |
| Above 10,00,000 | 30% | 30,000 - 45, 000 |
Step 2: Pick the best ELSS
Let’s know how to pick best ELSS funds. You can look into below steps to select it.
Past Performance and Age of the fund: Past performance speaks tremendous about one’s ability and likelihood for success. Definitely past performance can’t guarantee future returns, but it gives you indication of how the fund manager was able to generate returns during ups and downs of market cycle.
Consistency: This is very important for the people who have an investment time horizon of medium or long term, a fund can’t be judged based on its 1 year or 6 months returns.
XIRR of the fund: XIRR helps in calculating the internal rate of return for scheduled cash flows. Many of us don’t have lump sum amount to invest hence choose to invest periodically. By calculating the XIRR we can further filter best funds.
Step 3: Invest in ELSS online
If you are on step 3 this means you have already chosen the fund. Now it’s the turn to invest. Online mutual fund investment is a trend which you can skip to follow.
- Go to create an account
- Fill in all the required details in personal profile and FATCA form
- Fill in bank details
- Upload a cancel cheque
- YES you have successfully opened an account and now you are ready to invest.
- Click on invest now option on home page and select the fund chosen fund using step 2.
In case you were having some trouble choosing the best ELSS fund. We even have a list for best funds available on our website also.
Step 4: SIP or Lumpsum
We are always in dilemma whether to choose SIP or Lumpsum . While investing in ELSS funds SIP is always recommended because you will not be burdened with investing all amounts at once. I0074 will also give you benefit of rupee cost averaging.
We appreciate that an investment of Rs.1,50,000 p. a. would help investors save a substantial amount on taxes every year. However, many a time investors tend to invest this lumpsum amount towards the end of the financial year i.e. when the deadline to take tax benefit draws near. We feel it is not the right strategy to follow. The primary factor behind our reasoning is that ELSS funds are also equity oriented schemes and hence make them a bad choice with regards to timing the market. By trying to time the market every year on a similar date, investors would also be taking a risk of receiving negative returns on their investment.
Step 5: Redemption of ELSS:
As ELSS funds will provide you tax benefit, it will have a lock in period of 3 years. Once lock in period is over you have option to withdraw the complete or partial amount. Please note that the returns will be taxed as per Long term Capital gain tax (Capital gain upto Rs. 1 lakh in financial year will be tax free).It’s always advisable to rollover your SIP.
List of Steps to invest in ELSS funds
- Determine your Tax slab and taxable income
- Pick the best ELSS
- How to invest in ELSS online
- SIP or Lumpsum
- Redemption of ELSS
