Most of us are searching for savings options when the taxman is knocking at our door. We willingly or unknowingly ignore ELSS most of the time. The Equity Linked saving Scheme (ELSS) is a diversified tax saving mutual fund where most of the funds invested in equity markets.
Now, through the SIP route, you can start investing in ELSS schemes. However, you must remember that each investment will provide for a lock-in of 3 years from the date of investment. ELSS funds give you two options for growth and dividend. The growth option gives you a lump sum after the lock-in period completed, while the dividend option gives you a dividend each time the fund declares the dividend, even if it is in the lock-in period.
ELSS funds are becoming an increasingly popular tool; let’s find out why this can be useful for you.
Get tax savings and investment benefits
ELSS fund gives you double benefits. In fact,s due to the benefit of its equity exposure market, it helps in multiplying your wealth faster by keeping your taxes under check through the benefits of Section 80C. Consequently, unlike PPF, ELSS is not merely an essential vanilla saving tool. The ELSS opens up the possibility of receiving tangible benefits when you save taxes.
Short lock-in period relative to other tax saving options
Compared to other conventional instruments, ELSS has the shortest lock-in period in just three years. These include PPF (15 years), NSC (6 years), and FD (5 years) tax savings. Therefore, among the other options, ELSS has the highest liquidity.
Superior and tax-free returns
Returns from ELSS and PPF are tax-free from all the options available under Section 80C. However, due to its competitive position, ELSS offers you excellent returns. NSC and FD returns are taxable. Therefore ELSS gives you the best yields among all the instruments.
Investing in equity
You may worry about mutual fund investment. Therefore, if you have not invested directly or indirectly in equity markets, ELSS is the best way for you to continue your equity journey. If you invest directly or indirectly in the markets, a small rise or fall in the markets can lead to a wrong decision to sell. ELSS gets serious here. A 3-year lock-in term in ELSS leaves you tied up, and you can continuously see returns over three years. Looking at the last two decades, the ELSS has given the best returns compared to the rest of the 80C.
The only benefit of an ELSS to regular equity mutual funds is that they are tax-saving by nature. Meaning, if you invest in an ELSS account, the amount invested can be taken as a tax deduction under Section 80C. On the other hand, SIP or Systematic Investment Plan is an investment process.
Therefore, invest in SIP-based ELSS Tax Saving Funds to save taxes and earn better returns while balancing market risks.
Note: PPF is ideal for those who are absolutely at risk and can afford a lock-in period of 15 years. Whereas, investors willing to take a moderate risk for high returns can opt for ELSS.
The best way to reduce risk in ELSS is to stay invested for a long time.