Unlocked: Lesser-known facts about ELSS

The most widely used investment philosophy for tax savings is ELSS. There are, however, some lesser-known facts concerning it. So, what exactly are they? Let us investigate.

One of the most popular tax-saving methods is the ELSS (Equity-Linked Saving Scheme). Most financial planners recommend ELSS because they offer capital appreciation in addition to tax savings.

As everyone is aware, ELSS is eligible for the tax deduction provided under section 80C of the Income Tax Act of 1961. However, because this is an equity-oriented mutual fund, any redemption beyond the lock-in period would be deemed Long-Term Capital Gains (LTCG) and taxed at a rate of 10% and gains up to Rs 1 lakh are tax exempt.

Having said that, here are a few lesser-known facts concerning ELSS.

Governance 

The finance ministry actively governs all ELSS, whether open-ended or closed-ended. They, like other mutual funds, are not regulated by the Securities and Exchange Board of India (SEBI). The finance ministry makes decisions on where and how ELSS funds can be invested.

Death of unitholder

If a unitholder dies, their nominees get funds immediately if the fund is not an ELSS. However, in the case of an ELSS fund, the nominee receives the units or their equivalent value one year after the date of assignment of each unit.

Arbitrage 

ELSS can only invest in stocks and bonds that can be converted into shares. The fund is not permitted to participate in arbitrage activities. This is what the majority of non-ELSS funds undertake to mitigate risk. 

Portfolio 

ELSS funds are required to allocate at least 80% of their assets to equity and related instruments. They can invest the remaining 20% in cash or money market instruments to cover the redemptions. The fund manager has complete control over the equity portion of the portfolio. This implies that, like a flexi-cap fund, they may invest across market capitalisation.