As an Indian investor, you have numerous options to save on income tax while growing your wealth. Equity Linked Savings Schemes (ELSS) are a popular choice among these. Elss mutual funds combine the benefits of equity investments with tax-saving advantages, making them an attractive option for savvy investors.

What is ELSS?

ELSS fund is a type of mutual fund that offers both tax-saving benefits and potential long-term capital growth. These funds primarily invest in equity and equity-related instruments, allowing investors to participate in the stock market while saving on taxes. 

ELSS mutual funds have a lock-in period of three years, which means your funds remain invested for a minimum duration before you can withdraw them.

What exactly is the tax exemption available on ELSS funds?

Section 80C deduction:

Investing in Elss Funds qualifies you for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. 

This deduction is part of the overall limit of Rs. 1.5 lakh, which includes other eligible investments and expenses such as Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), and more. You can significantly reduce your taxable income by investing the maximum permissible amount in ELSS funds.

Long-term capital gains (LTCG) tax benefit:

After the completion of the three-year lock-in period, your ELSS investments become eligible for long-term capital gains tax benefits. A 10% LTCG is applicable on profits that exceed Rs.1 lakh annually. 

Wealth creation potential:

Beyond the immediate tax benefits, ELSS funds offer the potential for substantial wealth creation over the long term. As equities have historically outperformed other asset classes in the long run, investing in ELSS funds can help you build a substantial corpus to achieve your financial goals.

To wrap up

Investing in ELSS mutual funds can be a smart and tax-efficient way to save for your financial goals while simultaneously reducing your tax liability. Assessing your risk tolerance and financial goals before making any investment decisions is crucial. 

Additionally, ensure you understand the three-year lock-in period associated with ELSS funds and refrain from redeeming your investments prematurely, as it may lead to the forfeiture of tax benefits.

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