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December 6, 2019
Finance

Five reasons why you should invest in an ELSS this year

Equity Linked Savings Scheme (ELSS) is a tax saving mutual fund which invests primarily in the stock market. Amongst myriad tax saving investment options, ELSS funds offer one of the best market-linked returns, making it a popular investment avenue. The tax saver mutual fund combines the best of equity exposure and tax-savings to provide enhanced returns that can contribute to wealth creation. 

Here we look at the top five reasons why you could consider ELSS investments. 

  • Tax deduction under Section 80C

When you invest in ELSS, you can claim an exemption on your investments up to Rs.1.5 lakh under Section 80C of the Income Tax Act. Though the maximum deduction under the umbrella limit is capped, you are free to invest more than that. However, the additional amount would not be eligible for deduction. Thus, you can save up to Rs.46,800 (31.2% of Rs.1.5 lakh) on your ELSS investments.

  • Lowest lock-in period

Most tax-saving instruments have a mandatory lock-in period. For example, Public Provident Fund (PPF) and National Savings Certificate (NSC) have a lock-in period of fifteen and five years, respectively. ELSS mutual fund tax saver has a lock-in period of three years which is the lowest when compared to other investment products. This gives investors the freedom to redeem their investments once the lock-in period ends. However, it is recommended to invest in ELSS for a minimum of five years to weather market volatilities.

  • Better post-tax returns

From April 2018, returns on equities attract a long term capital gain (LTCG) tax at 10%. However, gains up to Rs.1 lakh are exempt from LTCG tax and only returns beyond that are taxable. Even after the introduction of LTCG, ELSS offers higher post-tax returns than traditional investment options. For example, NSC earns returns between 7% and 8% as opposed to ELSS, which earns 15% to 18% returns.

  • Equity exposure

ELSS is considered an ideal tax saving investment option for new investors looking to enter the equity market. Besides investing in traditional investments with assured returns, investing in ELSS could also provide them with a small exposure to equity. They can choose to stay invested for up to five years and adopt a long-term investment approach. 

  • No maturity date

Most traditional tax-saving instruments such as term deposits, PPF and NSC among others, have a fixed maturity date. For example, a PPF account matures in fifteen years and investors have the option to extend the investment in a block of five years. An ELSS has no such fixed maturity date, and hence, you can keep investing till you meet your financial goals.

Conclusion

ELSS mutual fund have a significant edge over other conventional tax saving instruments under Section 80C. With the shortest lock-in period, ease of investment and higher post-tax returns investing in ELSS can add excellent investment value to your portfolio.

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