L&T Mutual Fund
L&T Mutual Fund

Tax Planning with Mutual Fund

What is the risk associated with ELSS?

ELSS funds are essentially diversified equity funds and carry similar risk as equity funds as they both invest in the equity markets. But in addition to the implied equity risk component, ELSS funds have a three year lock-in period after investment during which the money from the fund cannot be taken out.

How is ELSS taxable?

Investments get tax deduction under Section 80C of the Income Tax Act, 1961 up to Rs. 1,50,000. ELSS funds fall under the exempt-exempt-exempt (EEE) category – which means that the amount invested, withdrawals and capital gains, all are tax free.
Apart from ELSS, the Employee Provident Fund and the Public Provident Fund are the only other investment options that enjoy the EEE tax treatment.

What is the lock in period?


All tax-saving investments have lock-in periods ranging from 3 to 15 years. A lock-in period basically means that the funds invested would not be before the expiry of the respective time period.

ELSS funds have a lock-in period of 3 years, the shortest among all options eligible for tax saving under Section 80C. Public Provident Fund has the highest lock-in of 15 years whereas other options like Tax saving FDs, Life Insurance Policy and National Savings Certificate have lock-in periods ranging from 5-10 years.

What options should one invest for - growth or dividend?


You can opt for the growth, dividend or dividend reinvestment plan. The growth plan is the cumulative option under which your investment will keep growing till you redeem it. In the dividend plan, the fund gives some amount back to if the fund's NAV has risen. The dividend received by the investor is tax-free.

Don't make the mistake of opting for the dividend reinvestment plan, under which the dividend payout is reinvested to buy more units of the scheme.

Every time this happens, the new units get locked in for another three years. So when you want to exit, there will always be some units still locked in. If you are stuck in the dividend reinvestment plan, you can write to the fund house and shift to the dividend payout plan

What is the threshold?

Most equity funds have a minimum investment limit of Rs 5,000, but ELSS funds have a lower threshold of Rs 500. New investors could start a SIP in ELSS and gradually grow their investment, with time.