Category: Investment Management

How does ELSS compare to other tax saving investments

ELSS, or Equity Linked Savings Scheme, is a type of diversified mutual fund that is linked to equities and qualifies for tax exemptions under Section 80C of the Income Tax Act. ELSS offers a unique combination of potential capital growth and tax benefits.

Tax Benefits of ELSS Funds

Investing in ELSS funds allows individuals to save up to Rs 1.5 lakhs on their income tax liability under Section 80C. Furthermore, the returns on these investments become tax-free for investors after a mandatory 3-year lock-in period.

ELSS Investment Tenure

ELSS funds come with a fixed lock-in period of 3 years, as per income tax regulations. This means premature redemptions are not permitted during this period. However, once the 3-year lock-in period is over, investors can choose to continue holding their investments in ELSS funds, with or without further contributions, for as long as they prefer.

How to Invest in ELSS Funds

Investing in ELSS is made convenient through the fund company's website. Investors can opt for lump-sum investments or use Systematic Investment Plans (SIP) for periodic investments. Each SIP installment is treated as a separate investment and carries a 3-year lock-in period. In the case of SIP investments, redemptions are processed on a first-in-first-out basis due to this lock-in period.

ELSS Investment Limits

The minimum investment amount for ELSS funds is Rs 500. While there is no upper limit on investments, the tax-saving benefit can be availed on a maximum of Rs 1.5 lakhs per year.

Risk and Returns in ELSS Funds

ELSS funds don't guarantee fixed returns, as their performance depends on the overall equity market performance. However, historical data shows that top-performing ELSS funds have the potential to deliver returns that outpace inflation over the long term. Returns vary between individual funds due to differences in their portfolios.

Eligibility to Invest in ELSS Funds

Both individuals and Hindu Undivided Families (HUFs) are eligible to invest in tax-saving mutual funds. Notably, most mutual fund companies do not accept investments from U.S. and Canadian citizens who are NRIs. However, NRIs residing in other countries can invest in ELSS funds.

Growth and Dividend Plans

ELSS funds offer two plan options: growth and dividend. The growth plan is geared toward long-term wealth creation. In the dividend plan, investors can choose between dividend payout or dividend reinvestment. The dividends received are not taxable. If dividend reinvestment is selected, it's considered a fresh investment, allowing investors to claim tax benefits on it.

Why ELSS Funds Outshine Other Tax-Saving Investments

  • ELSS funds offer the potential for higher returns over the long term compared to other tax-saving options like NSC, PPF, and VPF, thanks to their substantial equity allocation.
  • ELSS funds have the shortest lock-in period at just 3 years, giving investors flexibility and liquidity.
  • Unlike traditional tax-saving options with long lock-in periods (e.g., 15 years for PPF), ELSS funds offer the advantage of potentially stopping further investments after the 3-year lock-in period, providing investors with control.

In summary, ELSS funds are a compelling choice for investors who are comfortable with some level of risk and require tax-saving investment options. It's advisable to consult with a tax consultant or financial advisor to make well-informed investment decisions.

Debalina Roy Chowdhury Content Strategist Dilzer Consultants