5Mistakes/Misconceptions to avoid in ELSS Funds Investment

ELSS (Equity Linked Savings Scheme) Funds are the open ended equity mutual fund that helps you to save tax and to grow your investment by capital appreciation.

ELSS are the most preferred tax Savings Avenue for assesses nowadays. There are few mistakes /Misconceptions which has to be avoided while investing in the ELSS Funds.

1) Purchase on Last day of Financial Year:

ELSS Funds purchased during the financial year is allowed to get exempted from income of the Tax Payer under Sec 80 C of Income tax act up to maximum of Rs 1.5 Lakhs. Units of the ELSS Funds has to be in demat/folio before 31^st March of every year.

# Few Investors purchase ELSS Funds on the last minute/last day of Financial Year to avoid taxes. ELSS funds has cut off timing at 2.00 PM on all working days. If it is invested after 2.00 pm on last working day. Allotment of units takes T+1 days by the AMC. So units gets allotted only in the next financial year. This will not qualify for the Income Tax Deductions.

For FY 19-20, Investments made 29^th March 2019 before 2.00 pm gets qualify for the Tax Deductions. Since 30^th and 31^st are holiday for the Mutual Funds.

Mentotax Recommends to Invest in ELSS Funds via SIP to avoid last minute hurdles.

2) Investing in Normal Funds:

In rush to avoid taxes, People invest in normal funds by mistake instead of ELSS Funds in the last minute. Planning your taxes in the beginning of financial year is advisable. Investment in normal funds will not qualify for tax deductions.

# Investing in normal funds by mistake and redeeming it to purchase ELSS Funds is time consuming and involves cost. Normal Funds redemption will take minimum T+2 days for proceeds to hit your account and they carry carry exit load of 1% if it is redeemed before 1 year from date of purchase.

Mentotax advises you to select the ELSS Funds correctly before Investing.

3) Holdings of ELSS Funds

ELSS fund have statutory lock in period of 3 years. Few Investors have misconception that they can claim tax deductions for next 3 years on the investment and holdings in ELSS funds.

# New Investments made during the financial year only will qualify for the tax deductions and Assesse shall not claim tax benefits on the holdings of ELSS Funds purchased during the previous financial years.

4) Lock In for 3 Financial Year:

ELSS Funds invested will have to be held for minimum 3 years from the date of allotments of units. Each Purchase will have compulsory 3 years lock in period.

# Few Investors have misinterpretation that ELSS fund have lock in period of 3 financial year. Units will be available for redemption only if each investment completes 3 year from the date of allotment of units.

Example:

Investor purchased ELSS Fund on 5^th of April 2019, and units gets allotted on 6^th of April 2019. It will be available for redemption only on 7^th of April 2022. Each Purchase will have 3 year lock in period and not all the investment made on 2019 is available for redemption in 2022. And people also think that it has to be redeemed after 3 years. Your investment grows as long as it is invested.

5) Taxation:

ELSS Funds qualify for the Tax deduction every year on the investments but attracts Long Term Capital Gain (LTCG) Tax of 10% for the redeemed portion in excess of Rs 1.00 Lakh every year.

# Assesse think that ELSS Funds can be redeemed after 3 years without tax liability on the investment and capital appreciation. But it is only allowed up to Rs 1.00 Lakh/Year. If the amount redeemed exceeds Rs 1.00 Lakhs, Tax Payer has to pay 10% LTCG on the proceeds.

Mentotax recommends to Invest in ELSS Funds even though it attracts LTCG Tax of 10% for amount exceeding Rs 1.00 Lakhs because of Potential capital appreciation and Compounded returns in ELSS Funds.

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