Why Invest in ELSS?
There are a plethora of savings schemes to help you build your wealth, such as FD, PPF and NSC to name a few. Among the various options that are available to save tax, one of the most promising is equity-linked savings schemes (ELSS).
What are ELSS Funds?
An equity linked savings scheme is a type of mutual fund which invests primarily in equities i.e. shares of the companies listed in the share market with an intention of generating market-linked returns.
Out of the entire mutual fund landscape, the equity linked savings scheme or ELSS is the only mutual fund eligible for 80C deductions. ELSS is a diversified equity mutual fund that offers tax deductions up to Rs. 1.5 lakhs annually.
ELSS stands out with its dual-benefit – its returns are generally higher & partially taxable (Returns are not taxable until 31 March 2018. After 31 March 2018, returns will be taxable at a concessional rate of 10% if gains are over and above Rs. 1 lakh. This coupled with a mere lock-in period of 3 years is all the more reason for you to invest in ELSS now.
Even after the 10% tax cut, ELSS has the potential to deliver superior returns compared to other tax-saving instruments. The perks of ELSS investments are not limited to the taxes saved. The power of compounding ensures that your investment is doubled if you invest for, say, 5 years (tenure of tax-saving FD). To add to that, the minimum lock-in period is only 3 years.
Following are some reasons to invest in ELSS :
Lowest lock-in period
When you make any investment, the next thought is how and when you will be able to redeem it. With the lowest lock-in period of three years, ELSS funds do better than fixed deposits (FDs), public provident fund or national savings certificates that have a lock-in period of 5-15 years.
You can start investing in an ELSS with as little as Rs. 500 via a systematic investment plan (SIP) that will deduct a fixed amount from your bank account every month.
With ELSS funds, it is two birds in one stone compared with other schemes in Section 80C of the Income Tax Act. Investment in an ELSS funds plan entitles one a tax benefit up to 1, 50,000 as per Section 80C of the Income Tax Act, 1961
As mentioned before, as the lock in period of ELSS funds are 3 years, the gains are treated as long-term gains and they are taxed at 10% for gains over 1 lakh rupees.
High Level of Transparency
With an ELSS funds, there is a high level of transparency as you are completely aware of every transaction and fund details which are a part of your investment portfolio.
Before getting into new investment ventures, people consider a lot of factors; age, investment horizon and risk appetite being a few among them. People who want dual benefits of wealth accumulation and tax benefits prefer ELSS.
Long term investors with higher risk appetite find ELSS a sensible option.