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Is ELSS a good option as tax saving investment?

Claire Jesse by Claire Jesse
December 16, 2021
in Finance
0
Is ELSS a good option as tax saving investment?

One of the best ways you can save tax this fiscal year is by investing in a tax saver fund like Equity Linked Savings Scheme (ELSS). If you take a look at the other tax saving instruments under Section 80C of the Indian Income Tax Act, 1961 ELSS is a far better option for an end number of reasons. Since ELSS is a market linked scheme that spreads its portfolio across market capitalization, there are chances of long term wealth accumulation as well. So who wouldn’t want to invest a tax saving scheme that not only brings down their tax liability but also gives them a chance to earn a decent corpus in the long run?

Let us fund out more about ELSS and whether it is an ideal tax saving option.

What is ELSS?

Equity Linked Savings Scheme or ELSS as it is commonly referred to as, a tax saver mutual fund scheme that comes with a three year lock-in period and tax benefit. ELSS is the only mutual fund scheme to offer a tax benefit. This equity oriented tax saving scheme invests the majority of its investible corpus in equity and equity related instruments of companies publicly listed in India. As per Section 80C, a tax paying citizen can invest up to Rs. 1.5 lacs every fiscal year in an ELSS scheme and claim for tax exemption on the sum invested.

What makes ELSS an ideal tax saving tool?

Invest more than Rs. 1.5 lacs

Although one cannot seek tax exemption for ELSS investments exceeding Rs. 1.5 lacs, ELSS does not have any upper limit. Investors can invest as much as they wish depending on their risk appetite and their ultimate financial goal. Before deciding the monthly investment sum in this tax saver fund, investors can consult their financial advisor.

No compulsory investing

Although it is a good habit to invest in ELSS funds regularly to ensure that you save tax and do not have to make a large lumpsum investment at the end of the tax season, investors aren’t obligated to continue investing for any fixed duration. They can stop their investments in ELSS at any given time and similarly, even start investing without any prior notice. This gives investors a lot of flexibility, unlike other tax saving schemes where you need to invest the entire investment sum at the beginning of the investment cycle.

A short lock-in period

If you compare to other tax saving instruments under Section 80C, ELSS has a short lock-in period. ELSS comes with a statutory lock-in period of 3 years. According to this, investors cannot redeem or sell their ELSS investments for a minimum duration of 36 months from the first date of investment. Other tax saving schemes come with a lock-in period that spans anywhere between 5 to 15 years or even more. Since ELSS has the shortest lock-in period, it offers more liquidity and other tax saving instrument.

Option of SIP

One of the biggest advantages ELSS investors have over others is that they can invest small, fixed sums regularly in this tax saving scheme by option for the Systematic Investment Plan (SIP). SIPs are only available for mutual funds and thus, one can invest in ELSS via SIP. For example, if you wish to invest 1 lac every year in ELSS to save tax, you need not invest this sum all at once. Through SIP, you can invest Rs 8000 – Rs 1000 every month and still will be able to save tax.

ELSS is an equity scheme that does not guarantee returns. Please consult a financial advisor before investing.

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