Everything you need to know about ELSS funds

ELSS stands for Equity Linked Savings Scheme

There are many mutual fund companies with a lot of schemes under their wing. Often, they talk about mutual funds and its many benefits. One particular scheme that you might have heard about in particular is the ELSS funds.  It is a type of mutual fund that is exempt from taxation by the Government of India.

When you invest in a mutual fund, there will be others like you who will be investing money in it as well. This money put together will be distributed by the fund manager and used to buy other securities like notes, bonds, stocks, etc. If these securities perform well and return a profit, each of you gets a fraction of the profit. Now, an equity fund is a kind of mutual fund where your money is used directly by you to buy shares of the ownership of a company so you become a shareholder. If part of the company running on your capital earns profits, you would be paid a part of the profits. This payment is called dividend.

ELSS mutual funds or simply ELSS are diversified equity schemes. This scheme falls under a special exemption of the Section 80C of the Constitution of India. These funds come in with a three-year lock-in period, which means you won’t be able to redeem your shares until three years have passed. The best part of this scheme is that it is one of the most efficient tax-saving financial vehicles.

How Does a Tax on Mutual Funds Work?

However, not everyone likes to invest in ELSS. A lot of people invest in other equity funds or debt funds. And these come with Mutual Fund Taxation, which means that there will be a tax applied to the profits you make from the equity or debt funds.



There are types of mutual funds taxes: 

• Dividend Distribution Tax – The DDT is the tax that needs to be paid by the company paying out the dividends. The company is liable to pay a fifteen percent tax within fourteen days after the declaration of the dividend payment.
• STCG tax- The short-term capital gain tax is applicable to short term holdings, a holding being the period of time for which you invest in the scheme. For debt funds, the holding period is less than three years and, for equity funds, it is less than a year.
• LTCG tax- The Long-Term capital gain tax is applicable to a holding period of more than three years for debt funds and for more than a year when it comes to equity funds.