The Equity Linked Saving Scheme is a Mutual Fund providing tax savings and income growth. These are open-ended investment vehicles focusing on the Stock Market. Many fund schemes are available to help you earn decent returns. However, these funds have one significant advantage over others: tax benefits.
ELSS is famous among investors because of its potentially high returns. It also has the shortest lock-in period of all tax-saving instruments under Section 80C. However, most fund houses advise you to stay invested for longer than three years to earn decent returns. Though the fund performance varies across time horizons, the returns earned are higher than traditional investments. Here are a few aspects to learn:
Lock-in Period
ELSS comes with a three-year lock-in period, meaning you can redeem only after three years from the investment date. This lock-in period is the lowest compared with tax-saving schemes like Public Provident Fund or PPF (15 years), Tax-Saving Fixed Deposit, and National Savings Certificates or NSC (5 years each).
Tax Benefits
Investments up to Rs. 1.5 lakh in a financial year is deductible from your gross income under Section 80C of the Income Tax Act. Since they are equity-oriented, they provide inflation-indexed returns over time, allowing you to save for goals.
Tax on Returns
When you invest in Mutual Funds online, you earn long-term capital gains on redemption. These gains are tax-free up to Rs. 1 lakh in a financial year. Upon exceeding, you pay 10% tax on any long-term capital gain.
Long-term Investment
Remember that the returns on these funds link to the Stock Market fortunes. Therefore, they are not guaranteed. Though the lock-in period is shorter than other schemes, you might benefit by staying invested for the long term and earn returns from Equity.
Best for Beginners
For a beginner, an ELSS investment is an excellent way to enter the Stock Market as the funds are professionally managed and is a mix of large and medium-sized stocks to ensure diversification and reduce risk. The tax benefit is what makes it exciting.
SIP Option
One of the best things about this scheme is that you can invest small amounts monthly through a Systematic Investment Plan. For example, rather than investing Rs. 1.5 lakh at one go for saving tax, you invest Rs. 12,500 each month. Each SIP instalment gets locked in for three years.
Above-average Returns
ELSS primarily invest in Equities, which can earn you higher returns than other asset classes over a longer period. It is a potent tax-saving scheme with shorter lock-in periods. Regular investments in the fund can provide you with the benefit of investment discipline. It lets you reduce your tax liability while compounding wealth over time.
Conclusion
ELSS works well for salaried individuals besides offering competitive returns. Along with tax benefits, you gain financial discipline and may attain your investment goals with short-term risk and possibly good returns over the long term.