Benefits of Investing in Equity-Linked Saving Schemes (ELSS)

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  • 06 Feb 2023

ELSS mutual funds invest most of their assets in equity-related instruments. This helps in bringing higher returns along with tax benefits.

Here some of the key benefits of ELSS:

Tax Benefit Under Section 80C

The tax-saving nature of ELSS funds makes it a preferred investment tool. The investments made in ELSS are eligible for a tax deduction of up to Rs 1.5 lakh. You can claim deductions under Section 80C of the Income Tax Act. This unique blend of equity and tax-saving mechanism has made it popular among new and experienced investors alike.

Related: Filing Income Tax Returns - Common Mistakes

Shortest Lock-in Period

Almost every major tax-saving instrument comes with a mandatory lock-in period, from Public Provident Fund (PPF), National Savings Scheme (NSC), to traditional bank fixed deposits (FDs). This is also the case with ELSS. While PPF has the longest period of 15 years, NSC and bank FDs are set for a minimum period of five years. In comparison, ELSS has the shortest lock-in period of just three years. This mandatory lock-in helps beginners to withstand the volatility of the stock market while giving the scheme enough time to multiply the returns.

Higher Returns

In ELSS, the major part of the financial corpus is invested in equity. You can expect a much higher return than any other traditional tax-saver. Being a market-linked investment scheme, an ELSS fund has the potential to provide a return between 15%–18%. Of course, equity-based investments do carry an element of risk. However, the lock-in makes it easy to absorb the loss and continue growing throughout the tenure.

Related: Mistakes to Avoid While Investing in ELSS

Long-term Capital Gains (LTCG):

As ELSS is an equity scheme, it attracts a Long-Term Capital Gains (LTCG) tax of 10% on the profits received. This is applied when the amount crosses the threshold of Rs 1 lakh per year. Despite that, it is still a tax-saving scheme. So, you can always claim deductions under the specified Income Tax act.

**Related: **What is Luxury Tax in India?

Different Ways To Invest:

Like any other mutual fund investment, an ELSS also has different modes of investment. You can choose to invest in a lump sum or at regular intervals. Alternatively, you may go for a systematic investment plan (SIP). ELSS investment in SIP means depositing a fixed amount at regular intervals. However, if SIP is your preferred mode of investment, keep in mind that each SIP instalment in ELSS will have a lock-in of three years. You can continue to invest in an ELSS as an open-ended scheme once the lock-in is over.

Summing Up

With the lowest lock-in period, SIP option, and superior returns, ELSS is possibly the best option you can get under Section 80C. Though it attracts LTCG, it is still one of the best tax-saving instruments. The results could be even better if you stretch the tenure for at least two more years.

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