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1/30/2009 Equity Linked Savings Schemes (ELSS) Page 1 of 7
Equity Linked Savings Schemes (ELSS)
Equity Linked Savings Schemes
The Equity Linked Savings Schemes are popularly known as ELSS. ELSS is a
variant of diversified equity funds however these schemes come along with
income tax benefits. Investment in ELSS is eligible for a tax deduction under
section 80 (C) of the Income Tax Act. However the income tax deduction
comes with a lock-in-period of 3 years. ELSS are governed by ELSS 2005
guidelines of Central Board for Direct Taxes, Ministry of Finance, Govt. of
India apart from the usual SEBI (Mutual Funds) Regulations, 1996.
ELSS – More Than Just A Tax Saver
An ELSS fund is very similar to an equity fund. The main difference however
is a three-year lock-in period which means you cannot withdraw your money
for the first three years. This may seem harsh, but the lock-in period can work
to your advantage. Why? Because it helps the fund manager to build a
portfolio without worrying about holding large amounts of cash to service
redemptions. This means the fund manager can devote a larger portion of the
portfolio to equities, which have the potential to perform better.
While past performance does not guarantee future returns, you can see that
the ELSS lock-in rule (though it may seem like bitter medicine at the start of
the investment period) has provided the impetus for out-performance.
Which Tax Saver Is Right For You?
Section 80c offers you the flexibility to offset up to Rs.1lakh of your annual
income against long term commitments including life insurance premiums,
housing loan repayments and educations fees. Alternatively you can choose to
make investment for your future. Or, combine both! If you are opting to
invest, the key is to choose the route that suite your personal circumstances
and attitude towards risk.
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