ELSS redemption: Know your options
New Delhi : The Equity Linked Savings Scheme (ELSS) is a mutual fund that has a majority asset allocation in equity and equity-linked securities (up to 65% of the portfolio). These include listed shares and stocks, apart from fixed income securities. The fund has a lock-in period of only three years, after which it may be redeemed. However, it is advised that one stays invested in it beyond the lock-in period to gain higher returns on their invested corpus.
What are the benefits of investing in ELSS?
The question is, why should one choose an ELSS fund over other options? Consider the following benefits of doing so:
The ELSS is the only mutual fund in India to offer the tax saving provisions available for other options included under Sec 80C of the Income Tax Act, 1961. Indeed, it is known as a ‘tax saving mutual fund’ in regular investment parlance. You can claim a tax deduction of up to Rs 1,50,000 per year under Sec 80C for your ELSS investment. Thus, you can save up to Rs 46,800 per year in taxes. But you cannot partially or fully withdraw against the investment for three years from the time of commencement.
Since it majorly invests in equities, it often offers high returns that beat inflation. Not only do you get the tax benefit with the ELSS, but you can also use it as a wealth creation tool.
The tax saving ELSS fund has a lock-in period of just three years. This gives you the leeway to discontinue it if you feel that it is not the right option for your financial goals.
There is no upper limit on the ELSS investment. The minimum amount you may invest per month depends on the fund house you partner with/buy the mutual fund from.
When invested over the long term, the ELSS fund helps in creating wealth for important goals like children’s education, children’s wedding, spousal support in your absence, retirement, etc.
How to redeem the ELSS fund
As mentioned above, you may redeem the ELSS only after the mandatory three-year lock-in period is complete. There are some rules to follow for redemption:
• If you have invested in the fund in a lump sum amount, i.e., paid the money in one single payment, then the mutual funds are allotted on the same day. Thus, all the fund units are also redeemed on the same day after the lock-in period is complete.
• But the redemption becomes different if you invest in the ELSS via an SIP (Systematic Investment Plan). As you are aware, the SIP investment is usually a monthly one in small increments. If you have an SIP earmarked for the ELSS fund, then each SIP instalment is considered a new investment. As a result, each successive SIP instalment has its own three-year lock-in period. The lock-in for each SIP is considered from the day of unit allocation when that month’s SIP is debited.
• Thus, if you are looking to redeem all the fund units at one go, you should take the lump sum investment route and not the SIP route. If you do take the latter route, your fund manager can give you a breakdown of how many units you can redeem by a certain date, based on the SIP instalment payment date.
• The redeemed fund money is transferred to your bank account upon receiving the request.
How to invest in the right tax saving ELSS
It is now time to turn your attention towards making the ELSS investment. This is how you can do it:
Do your research: It helps to know which ELSS funds are the top performing ones in India, and why. The scheme document lists its recent performance and future projections, so do study it in detail. Once you have this information, you can find a suitable fund house to transact the fund.
Select a good fund house: You might have a fair understanding of the markets and even pick the best tax saving mutual fund for yourself. But why not entrust an expert with a daily eye on the markets to recommend and manage the fund for you? An experienced fund manager can help you pick the best ELSS fund based on your financial goals and investment horizon and monitor it closely. Their inputs can help you build a well-rounded portfolio to meet all your goals.
Invest in the fund: The fund manager can handle the paperwork and cheque processing on your behalf. If you would rather buy it on your own, you can visit the fund company website and follow their instructions on making the investment. Do note that you must surrender details about your PAN, Aadhaar and income while investing.
Did you find this information useful? Tell us in the comments section below.
