By The BuyT team
ELSS (Equity-linked Savings Scheme) are mutual fund investment scheme with the benefit of tax exemption along with a return on your investment. You can invest in ELSS if you are willing to take a moderate risk and remain invested for at least three years. These financial instruments come with a tax exemption of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Other financial investments eligible under the section are PPF (Public Provident Fund), tax-saving FD (Fixed Deposit), NSC (National Saving Certificate), NPS (National Pension System), ULIP (Unit-Linked Insurance Plans), etc. Let us discuss how ELSS is the best option for your tax planning.
Greater tax saving
ELSS comes with a lock-in period of three years. Therefore, it is entitled to long-term capital gains (LTCG)rules. The interest earned up to Rs 1 lakh within a financial year under LTCG is exempt from taxation. Beyond Rs 1 lakh the interest incurs the LTCG tax of 10%. So, you get the dual benefit of exemption under section 80C and additional tax saving on interest earned up to Rs 1 lakh from ELSS.
Tax efficiency
The tax on returns from other instruments, eligible under section 80C, like NSC and FD applies according to your income tax slab. But in ELSS return of up to Rs 1 lakh is considered as long term capital gains and is exempted. This makes ELSS the best investment option under section 80C. But you may feel that returns from PPF are non-taxable then why not choose it over ELSS. You will find the answer below.
Lowest lock-in period
PPF has a lock-in period of 15 years; tax saving FD has a five-year term; NPS locks your money until 60 years of age; ULIPs have a lock-in period for five years; and so on. Among tax-saving financial investments, ELSS offers the lowest lock-in period for your money. ELSS has a compulsory lock-in period of 3 years, which is the shortest amongst all the other tax-saving instruments.
Potential of higher returns
Mutual funds offer better returns on the investment than other financial instruments. ELSS funds invest a large percentage of their portfolio in equity. If you choose ELSS be ready to stay invested for a long-tenure to reap the benefit of equity. It requires around five to six years to generate stable returns. You can get higher returns by investing in ELSS as compared to the other tax savings investments like PPF, NPS, NSC, etc. The possible returns from ELSS can range from ten to twelve per cent in the long run.
Supports a first-time investor
If you are a beginner in the world of equity investment then ELSS is a good option to start with. ELSS gives you the dual benefit of multiplying your money along with a tax benefit. Professional fund managers invest your money after careful study of the stock market. In ELSS, fund managers invest money in a diversified portfolio. They choose stocks of Small-Cap to Large-Cap companies and different industries. So, the risk is less in this equity fund. If you opt for SIP (Systematic Investment Plan), it further neutralizes the risk and adds to the investment returns. Anyhow being market-linked, equity funds carry a risk in the short-term that can be avoided by staying invested for a long-term, at least for more than five years.
