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ELSS - Save Tax and Maximise Wealth

Are you looking for a smart way to save on taxes while building your wealth? If so, ELSS (Equity Linked Savings Schemes) might be the right solution for you. In this article, we'll explore how ELSS works, its various benefits and features, and how it can be used as an effective tool for tax savings and building wealth.

Equity Linked Savings Schemes (ELSS)

ELSS funds are equity-linked saving schemes that invest in a diversified basket of stocks. They have a lock-in period of 3 years, and with the tax benefits of mutual funds, they emerge as one of the most tax-efficient investment options available. ELSS funds offer the twin benefits of tax saving and wealth building. They help you save on taxes by providing a deduction of up to Rs 1.5 lakhs under Section 80C of the Income Tax Act. At the same time, ELSS funds also give you the potential to earn higher returns than the popular traditional tax-saving options. If you are looking for an investment option that can help you save taxes and build wealth in the long term, then ELSS funds are a good choice for you.

Comparing ELSS with other Tax-saving Instruments:

Let's look at other investment instruments that offer tax benefits under section 80C of the Income Tax Act.

  • Public Provident Fund (PPF) - PPF is a long-term investment option offered by the government. It has a lock-in period of 15 years and offers an interest rate of 7.1%* p.a. (Q3 of FY 2023-24). Investments in PPF are eligible for deduction under Section 80C of the Income Tax Act.
  • National Savings Certificate (NSC) - NSC is another government-backed investment scheme with a five-year lock-in period. It offers an interest rate of 7.7%* compounded annually (Q3 of FY 2023-24) but payable at maturity. Investments in NSC are eligible for deduction under Section 80C of the Income Tax Act.
  • Unit Linked Insurance Plan (ULIP) - ULIP is a life insurance policy with an investment component. It offers the benefit of life insurance along with the opportunity to grow your money through market-linked returns. The premium paid towards ULIP is eligible for deduction under Section 80C of the Income Tax Act.
  • 5-year Fixed Deposit (FD) - An FD is an investment instrument offered by banks. Investments made under 5-year FDs are tax deductible. However, interest is not tax deductible. 
Investment Instrument Lock-in Return
Public Provident Fund (PPF) 15 years 7.1%
National Savings Certificate (NSC) 5 years 7.7%
Unit Linked Insurance Plan (ULIP) 5 years Market-Linked
5-year Fixed Deposit (FD) 5 years 6%-7%
Equity Linked Savings Scheme (ELSS) 3 years Market-Linked

*Source - India Post

Benefits of Investing in ELSS 

  • Short Lock-in Period
  1. All the tax-saving instruments, as seen in the table above, have a certain number of years in the lock-in period. However, ELSS has the shortest lock-in period out of all the instruments of 3 years. Just to give you a perspective of what it means, funds invested in National Savings Certificate (NSC) would be free to use after 5 years; however, any amount invested in ELSS will be at your disposal in just a short span of 3 years.
  2. The lock-in period can be viewed as a blessing in disguise. It is a known fact that equity is volatile; however, in the long run, equity grows. This lock-in period of 3 years would promote the financial discipline of staying in the market for the long run and would, in turn, help you take advantage of the growing nature of equity. The lock-in period would also provide you additional tax benefits on the return earned due to the lock-in. The question of short-term capital gains will be completely eliminated, and you will only be paying long-term capital gains tax at 10% on the gains exceeding Rs. 1 lakh
  • Higher Returns- ELSS has historically provided higher returns than traditional tax-saving products like PPF and bank FDs. Since ELSS is an equity-linked mutual fund, it is linked to the stock market and, hence, has the potential to provide returns that can beat the returns of other tax-saving instruments. The equity exposure is great for investors who aim for higher growth potential but don’t have the knowledge or expertise to invest directly in the stock market. 
  • Diversification- ELSS funds invest in a diversified portfolio of companies, reducing the risk associated with investing in a single stock. By investing in a diversified portfolio, investors can spread their risk across multiple companies and sectors, reducing the impact of any individual stock's performance.
  • Managerial efficiency- Investing in the equity market requires a great deal of research. However, people are busy, and they cannot indulge in this type of research. Even if they do have the time to research, they aren’t trained in the field to make precise decisions or have the resources to be able to make these decisions. ELSS, on the other hand, is managed by trained individuals - fund managers who dedicate all of their time to choosing the best areas where you can park your hard-earned money.

ELSS is an ideal investment option for those looking to save on taxes and build wealth at the same time. Investing in ELSS funds has several advantages, such as diversification, tax savings, long-term capital appreciation potential and more. While there are certain risks associated with investing in equity-linked investments, these are offset by their high returns over a period of time compared to other traditional instruments like fixed deposits. Therefore, if you’re looking for a smart way to save on your taxes while building wealth in the long run, then ELSS could be a viable option for you.

Disclaimer: Tax-saving benefits are only available if you opt for the old tax regime. No tax benefit is available under the new tax regime for any investment instrument.