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ELSS to save on tax

How an equity-linked saving scheme works



An equity-linked saving scheme (ELSS) is an excellent avenue if you are looking at investing in the equity markets, and saving on tax. As the investments are locked in for a period of three years, the returns are also good in these schemes. Further, considering the tax advantages, the yield on investments is generally high.



ELSS is a type of diversified equity fund. Investing in ELSS is deductible under Section 80C of the Income Tax Act. ELSS is like any other equity fund. However, the lock-in period is three years. These funds come with all the usual trappings of an equity fund, which includes choice between dividend and growth options, and systematic investment plans.



The amount you plan to invest in an ELSS should be in multiples of Rs 500 with a minimum of Rs 500. The fund allots units to all complete applications, made in the specified form, not later than March 31 every year. Further, the plan should be open for a minimum period of three months. Investments in the plan will have to be kept for a minimum period of three years from the date of allotment of units. After the lock-in period of three years, you will have the option of tendering the units to the fund for repurchase. In case of death of the investor, the nominee or legal heir, will be able to withdraw the investment only after the completion of one year from the date of allotment of the units to the investor or anytime thereafter. The units issued under the plan can be transferred, assigned or pledged after three years of its issue.



Under the IT Act, investors investing in an ELSS can claim benefits under Section 80C. The limit under this Section is Rs 1 lakh. The dividends earned in an ELSS are tax-free. The returns on maturity are also tax-free.



The funds collected by the fund are invested in equities, cumulative convertible preference shares, fully convertible debentures and bonds of companies.

Investments may also be made in partly convertible debentures and bonds including those issued on rights basis subject to the condition that the non-convertible portion of the debentures so acquired will be disinvested within a period of 12 months. The fund needs to ensure that that the funds of the plan remain invested to the extent of at least 80 percent in securities as specified. The investments should be made within a period of six months from the date of closure of the plan in every year.



For short terms, the fund may invest the funds in short term money market instruments or other liquid instruments. After three years of the date of allotment of the units, the fund may hold up to 20 percent of net assets of the plan in short-term money market instruments and other liquid instruments to enable them to redeem investments of those unit holders who would seek to tender the units for repurchase.



The fund announces the repurchase price one year after the date of allotment of the units and thereafter on a half yearly basis. After a period of three years from the date of allotment of units, when the repurchase of units is to commence, the fund will announce a repurchase price every month or as frequently as may be decided by them.



To arrive at the repurchase price, the fund will take into account the unrealized appreciation in the value of investments made. While calculating the repurchase price, the fund may deduct such sums as are appropriate to meet management, selling and other expenses including realization of assets. Such sums should not exceed five percent per annum of the average net asset value of a plan. The repurchase of units will be at the repurchase price prevailing on the date the units are tendered for repurchase.



The investments made in any plan by an investor will be acknowledged by the fund through a certificate of investment or a statement of account. A plan operated by the fund would be terminated at the close of the tenth year from the year in which the allotment of units is made under the plan. If 90 percent or more of the units under any plan are repurchased before completion of 10 years, the fund may terminate that plan even before the stipulated period of 10 years and redeem the outstanding units at the final repurchase price to be fixed by them.

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