Investments aid wealth creation not just through returns and compounding, but also by enabling tax savings. Equity-linked savings scheme or ELSS is one such tax saving investment available for investors.

ELSS is a type of mutual fund with a majority exposure to equities and equities related instruments. However, investors will have to lock-in investment for three years to avail the tax benefit. Investors can choose between a growth-oriented or a dividend-oriented option.

Investments can be made as a lumpsum or a SIP under this tax-saving scheme. If you choose a SIP, note that each individual unit needs to be held for three years from the date of purchase to qualify for a tax deduction.

Below are the features of ELSS:

1. Market-linked returns

Since ELSS offers significant exposure to equity markets, they could offer a return potential higher than debt investments and beat inflation. Although profits are not guaranteed, in the long term, ELSS schemes could perform better than other fixed-income investments.

2. Three-year lock-in period

One of the key elements of an ELSS scheme is the minimum lock-in period of three years. When compared to other tax-saving plans under Section 80C,  ELSS has one of the lowest lock-in periods.

3. Tax deduction

Investments in ELSS are eligible for a tax deduction up to Rs.1,50,000 per annum under Section 80C of the Income Tax Act, 1961.

4. No maximum limit

Some tax-saving investment avenues, specifies the maximum amount that can be invested in a year. ELSS has no cap on the amount, although you cannot claim a tax deduction over Rs.1,50,000.

5. Flexibility

Investments in ELSS can be made in a lumpsum or through the SIP route. This can give investors enough flexibility to choose the right mode of investment.

6. Diversification

Essentially, ELSS are mutual funds that invest in different companies through equities. As an investor, ELSS could give you better exposure to multiple industries, compared to investing in pure equities or debt instruments.

Apart from ELSS, there are other popular tax-saving investments available in the market. These include the public provident fund, national pension scheme, national savings certificate and the tax-saving bank term deposit.

Given below is a comparison of the five products:

There are many reasons to invest in ELSS. For one, you get exposure to equity markets while saving on tax. Secondly, ELSS offers one of the shortest lock-in periods among all other tax-savers. However, tax benefits may not apply after the lock-in period. Also, after three years, it is not mandatory to redeem the amount. Thirdly, ELSS allows flexibility when investing; if you are unable to invest a lumpsum amount, you can choose to invest through a SIP.

Bottomline

ELSS can be a good option to consider if you are debating on how to save tax while creating wealth. Consider all the risks and other features before you invest. If you still have doubts, consult the FAQ below or reach out to your financial advisor.

Who should invest in ELSS?

Investors with high risk appetite and long-term investment horizon, looking to save tax can consider investing in ELSS.

What is the tax on income?

While investments of up to Rs.1,50,000 are eligible for tax deductions for HUF and individuals, any capital gain earned over Rs.1,00,000 will attract a long-term capital gains tax of 10%.

Is a lumpsum better than a SIP?

A lumpsum investment is good when the market is low. However, SIPs are better for investors looking to space it out time-wise and wanting financial discipline.

What are equity funds?

Equity funds invest primarily in different company stocks in the market.

How to invest in ELSS?

Like all mutual funds, register with a fund house either online or by visiting it. Complete KYC requirements, compare schemes and begin investing!  

This document provides general information and comparisons made are only for illustrative  and understanding purposes only. Investments in ELSS  inherently involve higher risks and recipient should consult their legal, tax and financial advisors before investing. Recipient of this document should understand that statements made herein regarding future prospects may not be realized. Recipient should also understand that any reference to the indices/ sectors/ securities/ schemes/ other instruments etc. in the document is only for illustration purpose and should not be considered as recommendation / investment advice in any manner whatsoever. Recipient of this information should understand that statements made herein regarding future prospects may or may not be realized or achieved.