ELSS: A Powerful Tax-Saving Instrument

How does ELSS score over other avenues?
ELSS has several advantages over traditional tax-saving options, with its shorter lock-in period and greater potential for inflation-beating returns.

• Decent ROI (return on investment)
  ELSS funds invest mainly in equity instruments and has potential to provide better long-term returns than other tax-saving investment alternatives under Section 80C. This helps accomplish two goals — you save money on taxes and simultaneously earn substantial returns. ELSS can be the right choice if you are willing to invest for a medium to long duration.
• Shorter lock-in period than other tax-saving investments
  The ELSS lock-in period is only 3 years, compared to 15 years for PPF, and 5 years for NSC and EPF.
• Flexibility
  ELSS offers investors the flexibility of both lump sum investment and SIP (systematic investment plan) options. Those investors who can’t invest a large amount at one time can use SIP to invest smaller fixed amounts in the scheme at regular intervals. This allows them to build up their investment corpus over time. It is important to note, however, that each SIP instalment will be locked in for a period of three years from the date it is credited to the scheme, so investors must plan accordingly. Together, the three-year lock-in period and SIP investment option encourage disciplined investment.

Can ELSS be coupled with PPF?
Yes – investors are not restricted to ELSS, and can also add other instruments like PPF to their portfolio. This combination gives the portfolio the dual advantage of stability through PPF, which is relatively low-risk, and the earnings potential of ELSS, which provides an opportunity to invest in equity.

How to choose the right ELSS
There are various parameters that can help you pick out the right ELSS. Look at the scheme’s previous returns, expense ratio and performance against its benchmark. Study its performance over the last five years – a robust fund will have a consistent track record of performance and returns. Look particularly at how well the fund has fared when the markets were down. Past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments.
Ultimately, ELSS is an investment avenue with tax advantages, potential to generate substantial returns and a short lock-in period. However, you should be cautious because the risks associated with it are higher due to the equity-oriented nature of the scheme. Consult a financial advisor who will help you pick the right ELSS.

*As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab. Finance Act, 2020 has announced a new tax regime giving taxpayers an option to pay taxes at a concessional rate (new slab rates) from FY 2020-21 onwards. Any individual/ HUF opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions. Since, individuals/ HUF opting for the new tax regime are not eligible for Chapter VI-A deductions, the investment in ELSS Funds cannot be claimed as deduction from the total income. Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.