For anyone looking to save taxes on their investments, ELSS can be a really good option. Not only equity-linked saving schemes will help you save taxes but also help you to wealth creation in the long term. In this blog, we are going to deep dive into everything you need to know about ELSS funds and why they might just be the best tax-saving investment for you.
What is ELSS?
ELSS, or Equity-Linked Savings Scheme, is one of the eligible mutual funds that can be invested in to obtain tax deductions under Section 80C of the Income Tax Act, 1961. Under this scheme, an investor is eligible for up to ₹1,50,000 as tax rebate in a year and, thus, save up to ₹46,800 in taxes. These funds are largely equity-based funds with at least 65% of the total portfolio in equities and equity-related instruments. ELSS funds could have some fixed income instruments also in their portfolio.
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Essential Benefits of ELSS Funds
- Income Tax Benefits: ELSS savings are eligible to claim tax rebates up to ₹1,50,000 under Section 80C
- Lock-in: Investments are kept locked in for three years that is the lowest compared to all Section 80C tax saving investment options
- Upper Limit Not Set: There isn't a minimum investment limit as such, while the minimum sum varies from house to house of funds.
- Potential for High Returns: ELSS funds have a high potential for delivering inflation-beating returns in the long run, especially when there is a substantial equity allocation.
- Wealth Creation: ELSS funds are a combination of tax-saving benefits and wealth-accumulation opportunities.
Why to Invest in ELSS Mutual Funds for Tax Saving?
ELSS funds provide benefits that no other tax-saving instrument, such as Fixed Deposits (FDs) or Public Provident Fund (PPF), can offer.
- Shortest Lock-in Period: ELSS has the shortest lock-in period among the investments under Section 80C, which is only three years.
- Higher Returns: ELSS funds may come with returns that are double compared to those from fixed deposits or PPFs.
- Flexibility in Investment: You can start saving with as small an amount as ₹100 every month by doing a Systematic Investment Plan, or SIP.
Factors to Consider Before Investing in ELSS
- Investment Horizon: ELSS funds are ideal for long-term investors, with a horizon of more than five years. This will help you ride out the volatility of the market and also benefit from compounding returns.
- Returns: ELSS funds do not provide assured returns like fixed-income instruments. The performance of the fund is directly related to the underlying securities. A longer horizon increases the probability of higher returns.
- Lock-in Period: Investments in ELSS funds are locked in for three years. Premature withdrawal is not allowed, making it essential to plan your finances accordingly.
SIP vs. Lump Sum: Which Mode is Better?
Systematic Investment Plan (SIP): Investing through SIP will help to distribute your investment over time and hence reduce the risk associated with market volatility. In case markets are down, you buy more units; when markets are up, you purchase fewer units. In the long term, it will average the cost of purchases, and in turn, enable better capital gains upon redemption.
Lump Sum Investment: You may consider a lump sum investment if you have a high-risk appetite and a long-term horizon, but this mode lacks the benefit of averaging and you may have to stay invested for 5-7 years or more to see significant gains.
How to Start Investing in ELSS?
The best thing about ELSS is that it's extremely easy to begin and also extremely convenient. It can be opted for SIP, or even made as a one-time investment in the lump sum amount. Some of the big fund houses have enabled investors to invest with a sum as small as ₹100 in a month.
How to Invest in ELSS
- Search for the correct ELSS Fund for your requirement and select.
- Select your investment method: SIP or one-time payment.
- Complete the KYC process if it is your first time investing in a mutual fund.
Begin investing and enjoy the double advantage of saving taxes and accumulating wealth.
Conclusion
ELSS mutual funds bring to the investor a winning combination of tax benefits and the prospects of higher returns. With the shortest lock-in period among the tax-saving instruments, flexibility of investment amount, and the potential to beat inflation, ELSS funds are sure to attract an investor. Whether you are an investor or an experienced one, ELSS is sure to get you closer to your financial goals while saving on taxes. Start today and take that step towards freedom.
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