Investment

How to invest in elss

Your browser will redirect to your requested content shortly. Who can how to invest in elss in RGESS?

How much can I invest? The maximum amount eligible for claiming benefit under RGESS is Rs. Fixed lock-in during first year followed by a flexible lock-in for subsequent two years. To encourage the savings of the small investors in domestic capital market. Union Budget 2012-13 is a new equity tax advantage savings scheme for equity investors in India. The scheme got it’s approval on September 21, 2012.

It is exclusively for the first time retail investors in securities market. The investors who invest up to Rs. 12 Lakhs will benefit from a new section 80CCG under the Income Tax Act, 1961 on ‘Deduction in respect of investment under an equity savings scheme’ has been introduced to give tax benefits. Let us say, you invest Rs. 50,000 under RGESS, the amount eligible for tax deduction from your income will be Rs. Alternatively, if you invest Rs. 40,000 under RGESS, the amount eligible for tax deduction will be Rs.

So you may save about Rs. Effective 1 April 2014, investors with a gross total income of up to Rs. 12 lakh can invest in RGESS, up from an earlier income limit of Rs. Investors can park funds in MFs and listed shares and extended tax benefits to three successive years. Most of the tax saving instruments under Section 80C are savings-oriented instruments, with returns after adjusting for inflation either in the negative or slightly positive. There is a three year lock-in period for the ELSS mutual funds.

Post the 36 months, the funds remain invested and work like any other open-ended mutual fund. It has been an established fact that in the long run, equity gives a much higher inflation adjusted returns when compared with any other investment, except for maybe real estate. ELSS is part of the Section 80C instruments that are cumulatively eligible for a deduction from income up to Rs 1 lakh. The three year lock-in period makes sure one stays invested. Otherwise in a normal mutual fund, one tends to withdraw in case of any monetary requirement. The lock-in period also helps the fund managers to plan their investments better and also to hold on to valuable investments as they do not have to worry about sudden redemption pressures. The above logic is proved in the higher returns achieved by the ELSS funds when compared to market returns.

Wealth creation because of this is much better than most of the other MFs. Only some sector-based MFs have given better returns than the ELSS fund in the past five years. The automatic investment from the bank through ECS makes it an easy way to invest. Those who want an income in between can opt for the dividend option. This is particularly suitable for senior citizens. Also, the ELSS gives a tax-free return compared to a bank or company deposit, which is taxable. The investment in an ELSS cannot be switched or closed before the three-year period is completed from the date of investment.

During market downturns, this becomes a limitation as one can only sit and watch the funds go down. One has the option of averaging when the market goes down, but an investment to save tax may not be required in the year in which the market is going down. The lock-in works negatively also for the monthly investment because the lock-in is calculated from the date of investment and not from the date the scheme was started. This means that the 12th month’s investment can be withdrawn only on the 48th month. This is a disadvantage compared to Ulips, where the lock-in is from the date of start of the scheme. Most fund houses start an ELSS regular investment at Rs 500 per month. Single investments start generally at Rs 5000.