Every year, around this time, everyone seeks to make investments to save tax at the end of the financial year. Some of the popular tax-saving investments include Public Provident Fund (PPF), life insurance policies, National Pension Scheme (NPS) and fixed deposits.
But one of the most effective tax-saving instruments under Section 80C of the Income Tax Act is the equity-linked savings scheme or ELSS. It's a great investment-cum-tax saving option for young and old alike.
What is ELSS?
ELSS is a mutual fund scheme that invests its corpus in the equity markets and aims to generate market-linked returns. You can claim an income deduction of up to Rs 1.5 lakh under Section 80C – which means you can reduce Rs 1.5 lakh from your taxable income. You can save up to Rs 46,800 in taxes if you are in the highest tax bracket by putting money in ELSS.
ELSS has a lock-in period of three years from the date you begin your investment. After this period, you can withdraw the funds. Equity markets tend to deliver better returns over the longer term and hence a three-year lock-in works in favour of the investors.
Why is ELSS one of the best tax-saving options?
Many experts believe that ELSS is better than all other 80C investments due to the following reasons
1. Higher returns: The best ELSS funds deliver 15-20% annualised returns over time-frames of five years and longer. This is higher than all other options. Of course, equity-linked investments carry greater risk, but over the longer-term it is a good option.
2. Shorter lock-in: Most 80C investments have lock-ins of five or more years. ELSS comes with a lock-in of just three years
3. Tax-efficient returns: Though long-term capital gains were introduced on mutual fund returns from last year, ELSS still provides among the most tax-efficient returns, barring PPF and NPS, whose returns are tax-free.
4. Flexibility and choice: It’s easy to buy and sell ELSS units. You can invest in a lump sum or through an SIP. What’s more, you can choose from a wide range of schemes that matches your needs.
But how do you choose an ELSS?
It's not the easiest job selecting the ELSS you want to invest in. Which is why our experts have picked a set of funds that you can consider.
ELSS Performance as on 10-Dec-2018
Lumpsum or SIP in an ELSS?
Experts recommend that one of the best ways to invest in the equity markets is through a systematic investment plan, because it reduces the risk of volatility. However, when it comes to ELSS, do remember that each of your SIP investments will mature after three years from the date of that investment. For example, let’s say you start a Rs 10,000 monthly SIP on April 1, 2019. Your last SIP instalment for the year would be March 1, 2020. While the lock-in on your first investment will end in April 2022, your last investment will mature only in March 2023. Hence, keep in mind your liquidity and cash flow requirement while making the investment. It is advisable to invest in ELSS in fewer instalments rather than monthly SIPs.
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.