As the tax-saving season approaches, investors often look for investment options that offer tax benefits and help them create wealth in the long run. Equity-Linked Savings Schemes (ELSS) an investment option offering tax benefits under Section 80C of the Income Tax Act, 1961, and providing an opportunity to invest in equity markets. This blog will discuss ELSS, its features, benefits, and how they differ from other tax-saving investment options.
What is ELSS?
Equity-Linked Savings Schemes (ELSS) are mutual funds that invest primarily in equity and equity-related instruments. These schemes offer a dual benefit of tax savings and capital appreciation by investing in the equity market. The lock-in period for ELSS is three years, which means investors can only redeem their investments after three years from the investment date.
Features of ELSS
- Equity-oriented: ELSS invests predominantly in equity and equity-related instruments, making it a high-risk, high-return investment option.
- Tax Benefits: Investments up to Rs. 1.5 lakhs in ELSS are eligible for tax benefits under Section 80C of the Income Tax Act, 1961.
- Lock-in period: The mandatory lock-in period is three years, the shortest among all tax-saving investment options.
- SIP investment: ELSS offers the facility of a Systematic Investment Plan (SIP), which allows investors to invest small amounts regularly.
- Professional management: ELSS is managed by professional fund managers with the expertise to manage equity investments and generate returns for investors.
Benefits of ELSS
- Diversification of investments: ELSS funds invest in a variety of asset classes. Furthermore, the fund invests in diversified equities of companies from various sectors and themes with varying market capitalizations. This diversification protects you from market volatility, ensuring you do not lose money if an industry or firm underperforms over the investing period.
- Lower Lock-in Period: ELSS mutual funds have a three-year lock-in term that is less than the lock-in length of other tax-saving 80C instruments, such as PPFs and ULIPs, which have lock-in periods of 5 and 15 years, respectively. The minimal lock-in time allows for early redemption, making ELSS funds a viable investment for your short and medium-term financial goals.
- Economical Minimum amount: You can start investing in ELSS funds with as little as ₹500. As a result, it is simple to invest a small amount each month rather than overwhelming yourself by setting away thousands of rupees outside of your budget.
- Taxation Benefits: By investing in tax-saving schemes like ELSS funds, you can reduce your taxable income by Rs 1.5 lakhs annually. This gives you a tax benefit of up to Rs. 46,800 annually. However, you still have to pay LTCG(Long term capital gains) tax if your profit exceeds Rs 1 lakh.
- Compounding Benefits: ELSS mutual funds have a minimum lock-in period of three months, and investment has plenty of time to grow without being redeemed prematurely. As a result, because you can only withdraw the corpus after three years, your portfolio can profit from compounding.
- Comparatively Higher Returns: ELSS funds, on average, provide a 10-12% CAGR which surpasses other 80C securities, like fixed deposits, PPFs (Public Provident Funds), and NSCs (National Savings Certificates), which yield 5-7% annual returns and may not outperform inflation.
Who should invest in ELSS?
- Unlike other SIPs, you cannot quit ELSS before the three-year lock-in period or redeem the units. So, invest if you are prepared for this lock-in period (up to three years). It aids in developing a discipline of regular investments that cannot be touched during the lock-in period.
- Most investors invest in ELSS to save taxes; however, it is always an equity mutual fund investment through a SIP. It is vulnerable to market risks; if you want safe solutions, consider PPF, tax-saving Fixed Deposits, and many more.
- According to experts, investing in ELSS through a Systematic Investment Plan (SIP) can provide optimal returns over the long term. They recommend continuing the investment for over three years, ideally stretching it to 5-7 years, to gain attractive returns. As ELSS funds primarily invest in equity, they can be volatile in the short term. However, holding the investment for a longer duration can stabilise the returns.
- Investors who aim to diversify their portfolios and balance their investments by investing in different asset classes and schemes may consider combining ELSS and PPF investments. By investing in ELSS and PPF, investors can achieve a mix of equities and government-backed debt securities offering returns and stability. This strategy can help investors spread their investment risk across different asset classes and schemes, achieving a balanced portfolio.
- By diversifying investments, ELSS benefits from market highs and reduces the impact of volatility during market lows. As the mode of payment is a SIP, it functions as a buffer against market fluctuations.
- By spreading the investments, ELSS benefits from market highs while mitigating the impact of volatility during market lows. Because the payment method is that of a SIP, it acts as a hedge against market fluctuations.
In conclusion, Equity-Linked Savings Schemes funds are a good option for investors seeking long-term capital appreciation and tax advantages. Although equity instruments are not a one-size-fits-all investment, evaluating your financial objectives before deciding whether to invest in Equity-Linked Savings Schemes funds is essential.
We hope this was an informative and pleasant read. You can check out some our previous blogs and LinkedIn Articles:
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