ELSS (Equity Linked Savings Scheme) – The best tax saving option

In recent times, we have seen that many taxpayers have moved to ELSS schemes to avail tax benefits. In this article, we will discuss varied aspects of tax-saving equity-linked savings schemes of mutual funds.

ELSS funds are equity-linked funds that invest a sizable chunk of their corpus into equity or equity-related instruments. They are called tax-saving schemes since they offer tax exemption from the annual taxable income under Section 80C of the Income-Tax Act.

Features of ELSS

  1. Market-linked returns

Since ELSS offers critical exposure to equity markets, they could offer a higher return than debt investments and beat inflation. Although profits are not guaranteed, ELSS schemes could perform better than other fixed-income investments in the long term.

  1. Three-year lock-in period

One of the critical aspects of an ELSS scheme is the minimum lock-in period of three years. In comparison to other tax-saving plans under Section 80C,  ELSS has one of the shortest lock-in periods.

  1. Tax deduction

Investments in ELSS are suitable for a tax deduction up to Rs.1,50,000 per annum under Section 80C of the Income Tax Act, 1961.

  1. No maximum limit

Some tax-saving investment avenues specify the maximum amount that can be invested in a year. ELSS has no cap on the amount, although one cannot claim a tax deduction over Rs.1,50,000.

  1. Flexibility

Investments in ELSS can be made in a lump sum or through the SIP route. It gives investors enough flexibility to choose the suitable method of investment.

  1. Heterogeneous

Typically, ELSS are mutual funds that invest in different companies through equities. Therefore, as an investor, ELSS could give you better exposure to multiple industries than investing in pure equities or debt instruments.

Other investment options eligible for Section 80C deductions like ULIP, NSC, tax-savings FDs come with a lock-in period of 5 years. Meanwhile, PPF has a lock-in period of 15 years, whereas NPS stays locked in until retirement with very limited options for premature withdrawals. Thus, ELSS funds offer the highest liquidity among all the investment options eligible for Section 80C deductions.

Salaried individuals receive income throughout the year and not as an annual lump sum. It is therefore important that saving and investment activities also follow a similar pattern as expenses. Mutual funds offer the Systematic Investment Plan (SIP) facility with ELSS, which regularly deploy savings. With SIPs, investing a fixed amount periodically (every week, month, etc.) in ELSS based on a one-time instruction is possible. It helps to save in a disciplined manner without disrupting or putting undue strain on one’s finances. In short, SIP enables to spread the tax planning burden throughout the year rather than in a month or two.  ELSS helps deploy regular savings almost instantaneously rather than let the money lie idle in the bank savings account. Thus, the saving will fetch better returns.

While choosing an ELSS scheme, it is pertinent to compare the performances of various ELSS funds over the last three year and five year periods with their benchmark indices.