Know why ELSS deserve your attention during tax season

Most individuals know the importance of financial planning, but very few are aware of the fact that it goes hand in hand with investment planning. People who do not prioritize investment planning often have a tough time determining how and where to invest their money so that they have something to submit to their HR during investment declaration. Investing in traditional tax saving instruments might help you save tax, but the returns are not that pleasing. However, there is one option that can not only help you save tax but also allow you to earn some decent returns in the long run.

ELSS or Equity Linked Savings Scheme is a mutual fund scheme that offers the dual benefit of saving taxes and the potential to create long term wealth.

What is an ELSS mutual fund scheme?

Equity Linked Savings Scheme or ELSS as it is commonly referred to as is an open ended equity mutual fund scheme that comes with a predetermined lock-in period and tax benefit. As per market regulator SEBI guidelines, an ELSS fund must invest the majority of its investible corpus in equity and equity related instruments of publicly listed companies. ELSS funds invest in stocks of companies spread across market capitalization, thus offering true diversification. These funds may also allocate a few of its assets to debt and money market instruments. ELSS comes with a predefined lock in of 3 years during which investors cannot redeem their investments.

If you want to save tax this fiscal year and also earn some decent returns, ELSS can help you with that. ELSS is famous among taxpayers as it offers the following tax benefits –

  • Investments made in ELSS funds every financial year qualify for tax free deduction. According to Section 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1.5 Lacs every fiscal year and claim tax benefit for this sum. When you declare these investments, your taxable income reduces and so does your tax liability. For example, if your gross income is Rs 12 Lacs, you can invest Rs. 1.5 Lacs in ELSS fund and now your taxable income will become Rs. 10.5 Lacs.
  • Also, capital gains of up to Rs 1 Lacs earned from ELSS every fiscal year are tax free. Any gains exceeding that sum will attract 10% tax.

Other ELSS benefits

Lowest lock in – If you compare to other tax saving instruments under Section 80C like PPF, NPS, Bank FD, etc., you will realize that ELSS has the shortest lock in period. While ELSS has a short lock in period of 3 years, the lock in period of other tax saving instruments can span anywhere between 5 years to 15 years.

Flexibility and affordability – When it comes to other tax saving instruments, investors need to have surplus capital and must invest all their investment sums right at the beginning of the investment cycle. Such is not the case with ELSS as one can start investing through SIP with an amount as low as Rs 500 per month. The option of Systematic Investment Plan (SIP) is only available for ELSS investments and no other type of tax saving scheme offers the SIP option.

Ideal for long term goals – Investors can continue investing in ELSS for as long as they wish to. If you continue to invest in this tax saver fund for 15 years or more, you might be able to achieve a commendable corpus and might even succeed in achieving your long term financial goals.