Are you confused about how to claim tax deductions in ELSS?
Many investors in tax saving mutual funds or Equity Linked Saving Schemes get confused about their SIP investments and claiming tax deductions on them.
For example, a reader asked us recently whether he can claim tax deduction on his two SIPs in two ELSS schemes. Another wanted to know whether he can continue the same SIP for the next year or should he start a new SIP to claim the tax deduction next year.
Seasoned investors may find the confusion unwarranted, but many new investors continue to harbour such misconception about their ELSS investments.
To begin with, investments in ELSS qualify for tax deductions of up to Rs 1.5 lakh in a financial year under Section 80C of the Income Tax act. You have to be careful about investing more than Rs 1.5 lakh in a financial year as you can’t claim tax deductions on your investments above Rs 1.5 lakh.
If you invest in one or multiple ELSS schemes, you can claim a maximum deduction of Rs 1.5 lakh in a financial year. There is no condition about the number of ELSSs to qualify for the tax deduction. In short, you can invest Rs 1.5 lakh in a single ELSS and claim tax deduction on the entire amount. Similarly, you distribute Rs 1.5 lakh among four ELSSs and claim tax deduction on Rs 1.5 lakh under Section 80C.
Now, the same rule applies to SIPs, too. For example, you can claim the maximum deduction of Rs 1.5 lakh whether you are investing Rs 1.5 lakh via an SIP or multiple SIPs. Similarly, you do not have to start a new SIP every year to claim the tax deduction. You can claim the tax deduction on the amount you invested in every financial year under Section 80C.
Also, it is not necessary to invest in a new scheme every year to claim the tax deduction. You can continue with the same scheme if it is performing well.
Another confusion is about keeping the money in ELSS. Some investors believe that they have to compulsorily take the money out of an ELSS scheme after the mandatory lock-in period. Every investment option under Seciton 80C, including ELSSs, come with a mandatory lock-in period. ELSS has the shortest mandatory lock-in period of three years. However, it is not necessary to take the money out of an ELSS after the mandatory lock-in period. You may continue with your investments if it performs well.