Among the available tax-saving investment alternatives, Equity Linked Savings Scheme, commonly referred to as ELSS, is one of the most popular options in the Indian financial space. Not only does it save on an investor’s tax liability, but it also has the potential for wealth creation in the long term because of the equity market exposure. It is thus an efficient and disciplined way of investing for those who want to save on taxes under Section 80C while looking at better returns-the ELSS mutual funds.
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What is ELSS (Equity Linked Savings Scheme)?
ELSS is a type of equity mutual fund, which invests largely in equity as well as equity-linked instruments. Such funds are eligible for tax deduction under Section 80C of the Income Tax Act, 1961, which allows a deduction of up to a maximum amount of ₹1.5 lakh in a financial year. The lock-in period of ELSS is 3 years, which is the shortest compared to other tax-saving options under Section 80C.
How are ELSS MFs Structured?
The ELSS funds invest a minimum of 80% of their assets in the equity market. The fund manager manages this portfolio accordingly in order to create long-term capital appreciation. An investor can invest a lumpsum as well as through a Systematic Investment Plan, which makes it apt for investment for salaried as well as self-employed individuals.
Also read: What Is SWP? Systematic Withdrawal Plan for Regular Income
Key Benefits of ELSS Mutual Funds
1. Tax Savings: Investment in ELSS is eligible for tax deduction as allowed by Section 80C of the Income Tax Act up to a maximum limit of ₹1.5 lakhs annually
2. Shortest Lock-in Period: ELSS also has only a lock-in period of 3 years, as compared to 5 years in tax-saving fixed deposits and 15 years in PPF.
3. Potential for Higher Returns: It is an equity-linked scheme, and since the investments are made in the stock market, the potential for returns may be higher than the other tax savings options.
4. SIP Flexibility: The ELSS SIPs allow investors to begin investing with a small investment, which develops discipline in investing.
5. Advantage for Long-Term Capital Gains ( In excess of ₹1 lakh: 10%
The gains in excess of ₹1 lakh are taxable at 10%, making an ELSS a tax
ELSS vs Other Tax-Saving Options
| Investment Option | Lock-in Period | Returns Potential | Tax Benefit |
|---|---|---|---|
| ELSS Mutual Fund | 3 Years | Market-linked (High) | Section 80C |
| PPF | 15 Years | Fixed (Moderate) | Section 80C |
| Tax Saver FD | 5 Years | Fixed (Low) | Section 80C |
| NSC | 5 Years | Fixed (Moderate) | Section 80C |
ELSS stands out due to its balance of tax savings, flexibility, and growth potential.
Who Should Invest in ELSS?
- Salaried people looking for tax savings along with wealth creation
- Young investors with long-term financial goals
- Investors comfortable with market-linked returns
- Individuals planning disciplined investments through SIP
Things to Consider Before Investing in ELSS
While ELSS offers attractive benefits, investors must consider their risk appetite and investment horizon to be in tune with their financial goals. Since ELSS invests essentially in equity markets, some short-term volatility is quite expected. It is ideal for investors with a long-term outlook of 5 years or more.
Conclusion
ELSS mutual funds are a great way of saving taxes, especially when you are looking to invest in a way that is both tax-efficient as well as focuses on long-term growth of capital. With the lowest lock-in period in the entire Section 80C savings options, possibilities of high return on investments, and the flexibility of SIP, proactively including ELSS mutual funds in your financial planning can help you save taxes as well as create a solid future.
Disclaimer: Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Past performance is not indicative of future results.
