Tax saving ideas: Why investing in ELSS makes sense

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All of us want to make money but very few of us know how. Investments help you make money. However, you need to be careful while choosing the right investment instrument for yourself as the market is flooded with options. There are investment tools like equity shares, mutual funds, fixed deposits, gold, real estate, etc. that attract everyone. Equity Linked Saving Scheme (ELSS) mutual funds wins over other investment tools as it helps in building wealth while saving tax.

Let us take a look at what ELSS is and why it makes for a good investment option.

What is ELSS?
Equity Linked Saving Schemes or ELSS as they are popularly called, are tax-saving mutual fund schemes. As the name suggests, ELSS schemes invest primarily in equity market and thus provide attractive returns. ELSS schemes are a favourite of many investors because they help in availing tax benefits. The money invested, interest earned and the redemption amount are all tax-free. There is a lock-in period of 3 years, which means that any investment you make in an ELSS scheme would be locked-in for a minimum period of 3 years and can be redeemed only after the 3-year lock-in period is over.

Why investing in ELSS makes sense?
ELSS investments are favoured and also recommended by financial experts because of the benefits they promise. Here are some reasons why ELSS is one of the best investment avenues:

Good returns
ELSS tends to provide attractive returns in comparison to other investment tools as most of the funds is invested in the equity market. According to reports, the best ELSS funds have delivered returns of around 20 per cent in the last five year.

Low risks
If you are wondering that equity investments are risky and volatile, you are right. However, ELSS funds do not have very high risks because the risk is diversified. ELSS schemes invest in equity shares of different companies, which reduces the risk and volatility inherent in equity investments. Moreover, there is also a component of debt investment in the ELSS fund’s portfolio which gives stability to returns.

Lower lock-in period
ELSS schemes have a lock-in period of only 3 years, which is quite low compared to 5-year fixed deposits, PPF accounts or NSC investments. Thus, ELSS schemes not only provide attractive returns, you can avail the returns within a short span of time too.

Tax exemption
This is perhaps the primary reason why investors are biased towards ELSS fund schemes. ELSS schemes promise triple tax advantage. Firstly, the money invested in an ELSS scheme up to a limit of Rs.1.5 lakhs is tax-free under Section 80C. Thus, you can lower your taxable income and consequently your tax liability through ELSS investments. Secondly, the returns generated from the scheme remain invested till the lock-in period. Thus, they also get tax exemption. Lastly, after the lock-in period is over, the returns you avail are called Long Term Capital Gains and become tax-free. This way ELSS schemes provide you triple tax exemptions. The money you invest, the returns your investment generates and the redemption value you avail are all tax-free.

You can choose to make investments in an ELSS scheme either in a lump sum or in monthly instalments through SIPs (Systematic Investment Plans). In both cases, the maximum limit is Rs.1.5 lakhs. In case of SIPs, the aggregate value of SIPs in any financial year should not exceed Rs.1.5 lakhs.

Which alternative is better – lump sum or SIP?

Systematic Investment Plans are a better choice as they free you from timing the market. Your investments are done regularly every month and you can get the benefit of rupee-cost averaging. Moreover, SIPs are also affordable as you can invest a minimum of Rs.500 per month in an ELSS fund through SIP.

What should you do?

ELSS investments make sense because of the impressive returns and their tax-saving feature. If you opt for SIP investments, you can develop a disciplined saving habit and also create a lump sum corpus. So, the next time you are considering an investment avenue, look for ELSS schemes and enjoy their benefits.