When it comes to ELSS, most investors are in a fix about whether to use the instrument for saving on taxes or for creating wealth. Luckily, the answer is more obvious than one would think. Let’s take a look at how ELSS can be useful for both.
What is ELSS?
ELSS refers to an equity-linked savings scheme. The primary attraction of investing in ELSS is receiving a tax rebate of up to Rs 1.5 lakh a year and saving on taxes. It is the only mutual fund that offers tax benefits under Section 80C.
The portfolio of these funds is equity-oriented with 65% of the portfolio invested in instruments such as shares.
ELSS as a tax-saving instrument
Investment in ELSS provides investors with tax relief under section 80C of the Income tax and one can get a tax rebate of up to Rs 1.50 lakh if you still opt in for the old regime. Accordingly, you can save up to INR 46,800 each year in taxes.
While you can choose to invest more than INR 1.5 lakh, any excess amount is not eligible to get tax benefits under the provision. ELSS schemes have a lock-in period of three years. So you can redeem the investment and reinvest the proceeds into a new ELSS fund to avail of the tax rebate in the fourth year.
Long-Term Capital Gains earned on ELSS are also exempted from taxation up to Rs 1 lakh and the dividend received is also not taxable at the hand of the investor.
ELSS as a wealth-creating tool
ELSS also works as a wealth creation tool as it primarily invests in equity instruments. Compared to other investment options, returns from an equity investment are much higher. This gives the investor an opportunity to generate higher returns. For an investor who wants to invest for a medium or long-term duration, ELSS works out to be a perfect choice. In fact, over the years, ELSS gives a return of 12 percent on average whereas traditional options such as PPF only offer 8 percent. Even though it is undeniable that the risks posed by ELSS are significantly higher than what fixed deposits or PPFs entail, there is a higher chance of the returns being much higher as well.
The shorter lock-in period of ELSS also works in favor of investors. A minimum of five years of lock is standard for investment avenues such as PPF, NSC, and EPF. However, with ELSS you need to remain locked in for only three years. You also don’t have to stay stuck with ELSS if you are unhappy with its performance. Since there is no multi-year deal, you can take your investment elsewhere once the lock-in period expires.
ELSS mutual funds are also a great choice for investors who want to protect their investments from the volatile behavior of stock markets. Given that investors can’t touch the investments for three years, ELSS also helps to build discipline and encourages one to get into the habit of investing more regularly. Compared to PF and insurance, a shorter lock-in period offered by ELSS makes it a better instrument for generating returns more efficiently. You also don’t have to invest a lump sum as ELSS offers investment in SIP mode as well. There is no cap on the amount you can park in ELSS even though the tax benefits are capped.
If you want to increase your chances of gaining the most out of ELSS investments, make sure to stay invested for a longer period of time.
Should you choose to invest in ELSS?
Like every investment option, whether you should invest in ELSS depends on a variety of factors including your risk appetite and financial goals. However, ELSS is a great option for anyone looking to generate a sizeable return and also save on taxes at the same time. For the benefits it offers, staying locked in for three years is well worth it.