Why ELSS is the Best Tax Saving Option?

Why ELSS is the Best Tax Saving Option?

Investing in ELSS funds is an efficient way to save taxes compared to the other investment instruments available under Section 80C of the Income Tax Act, 1961. ELSS comes with the advantage of a shorter lock-in period and professional fund management, which can lead to wealth accumulation.

Understanding Equity Linked Saving Schemes

ELSS mutual funds are managed by experienced finance professionals called fund managers and are offered by almost all the fund houses in India. ELSS mutual funds are the only class of mutual funds eligible for tax deductions. You can save up to Rs 46,800 (tax deductions of up to Rs 1,50,000) a year in taxes by investing in ELSS, which is covered under Section 80C of the Income Tax Act, 1961. However, you can support more than this designated amount, but the excess over Rs 1.5 lakh will not qualify you to avail of the tax benefits as per the provisions of Section 80C. The returns generated from ELSS are taxable with the dividend distribution tax (DDT) and taxes on Capital Gains (LTCG). Tax on long-term capital gains (LTCG) was reintroduced in the Union Budget 2018-19. ELSS has continued to dominate as the most preferred option among all Section 80C investment options despite changing the difference.

Types of ELSS

ELSS funds are broadly classified into dividend funds and growth funds.
  • Growth Fund is a long-term wealth creation platform for investors where the fund's total value is realised at the time of redemption.
  • Dividend Payout has two sub-categories – Dividend Payout and Dividend Reinvestment. Under the Dividend Payout option, you will receive tax-free dividends. In the case of Dividend Reinvestment, your rewards will be reinvested as a new investment.



Why ELSS is better than other 80C Investments

Despite the new tax regime, i.e. tax on Long-Term Capital Gains from ELSS, these funds, in the opinion of experts, still hold their place as one of the best tax-saving options. ELSS can play a significant role in your portfolio, and these equity-linked instruments can offer higher returns and are an ideal investment choice for the long term. Even with its tax returns, ELSS holds its ground with higher post-tax returns than any other Section 80C investment options such as Public Provident Funds (PPFs) and ULIPS.

Higher Returns on Investments (ROI)

Given that ELSS invests predominantly in equity instruments, the returns are much higher than most investment options with tax-saving benefits in the longer run. This serves two purposes; you not only save on taxes but also generate high returns/profits. ELSS can be the right choice for an individual willing to invest for a medium to long duration. Historical performance shows that ELSS generates about 12% over ten years and more. This, when compared to a mere 8% returns offered by PPF, is a significant gain.

Shorter Lock-in Investment Tenure 

ELSS has a lower lock-in period. Unlike the PPF, NSC and EPF, all of which requires a minimum of five years lock-in period, ELSS is a far better option with just three years of lock-in.

Flexibility with ELSS

It is possible that your ULIPs, which were sold to you at a low cost through insurance firms directly, generate returns similar to that of an ELSS in the longer run. However, what a ULIP doesn't offer is the flexibility of ELSS. If you are unhappy with your ELSS fund, you may move to another fund as you are not required to commit to a multi-year deal. In the case of a ULIP, if you are unhappy with the fund, you can only shift and invest in funds offers that ULIP offers that ULIP offers.

The advantages of Combining ELSS and EPF

Another clear advantage that ELSS enjoys over its counterparts is that it can be coupled with PPF for more significant benefits. This combination is a solid ground to uncover the stability offered by PPF and the earning potential of ELSS. If you see closely, you find out that there are further advantages to this arrangement; your portfolio is well diversified with a mix of debt and equity. You have the safety of government-backed securities with an opportunity to grow through equities.

Protection in times of volatility

ELSS mutual funds are often the first point of engagement for investors when investing in equity-linked investments. Many equity investors start their investments in equity-linked investment with these funds and then invest in equity mutual fund schemes. It helps to build discipline, given that you can't touch the fund for the lock-in period of three years. These funds also act as a solid shield to weather the volatility of investing in stock markets. The scheme benefits from the market highs and has provisions to lessen the impact of the lows.

Things to know about ELSS before you invest
  • You may invest any amount you like in an Equity-Linked Savings Scheme. However, investments of only Rs 1,50,000 a year are tax-exempt under Section 80C of the Income Tax Act, 1961.
  • It is one of the best investment options that offer tax benefits with potentially higher returns and a short lock-in period (3 years).
  • The Long-Term Capital Gains on ELSS are tax-exempt up to Rs 1 lakh, and the dividend received is tax-free in the hands of investors.
  • You can continue to invest in this scheme even after completing the lock-in period of three years.
  • The risk involved with ELSS is higher when compared to a fixed deposit or PPF, but the returns have the potential to be more elevated.

It is essential to consider all aspects of the funds and your investment objective before you make any investment. Consult an expert or visit ClearTax to invest in the top funds that experts handpick. There is something for every risk profile, and you can choose what best meets your financial requirements.




For more information on this, visit TAXAJ.


Posted by Aashima
Team TaxaJ

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