How ELSS mutual funds provide tax savings, high returns, and investment flexibility
For many working professionals, particularly amongst India’s middle class, tax saving investments are a key part of financial planning. In this regard, equity linked savings schemes or ELSS funds are a stand out option. These are a special type of mutual funds that use a market centric approach with added tax benefits as per Section 80C of Income Tax Act of India.
Let us explore the key reasons why you should opt for mutual funds to save on your tax liabilities:
One of the key advantages of ELSS funds as compared to the other tax saving options is its short lock-in period. ELSS requires you to stay invested for a minimum of three years which is considerably lower than many other traditional tax saving investment instruments. The table below provides a comparison of the lock in periods the popular tax savings instruments:
Type of funds | Lock in period |
Public provident fund | 15 years |
National savings certificate | 5 years |
Tax saving fixed deposits | 5 years |
Equity linked savings scheme | 3 years |
This shorter lock-in period allows your funds to become accessible sooner, giving you more flexibility and access to liquidity. And while the minimum lock-in is three years, you can also choose to stay invested for longer to maximise returns.
ELSS funds come with great flexibility when it comes to its investment tenure. Unlike some other tax saving options, there is no defined maturity period for ELSS. So while the mandatory lock in period is of 3 years, you can remain invested for as long as you want to maximise your returns. Long term investments of 7-10 years or even 15-20 years can be particularly rewarding in this regard.
Unlike traditional vehicles of investment that provide fixed returns, ELSS allows you to invest in equities that ensure the potential for higher returns in the long run. However such ELSS funds also come with some inherent risks since they are linked directly to the market. Moreover, traditional instruments such as fixed deposits ensure returns of around 5-6% while ELSS funds have the potential to deliver much higher returns of around 10-12% over the long term. By investing in ELSS, you also get the benefit of rupee cost averaging, especially if you invest through a systematic investment plan.
ELSS allows two different modes of investment. You can either invest a lump sum amount in one go or choose to invest a fixed amount in regular intervals such as monthly or quarterly via SIPs. This method helps you build wealth gradually as they allow you to buy units at different price points. SIP investments are quite useful in volatile markets and reduce your overall exposure from short term market swings.
Much like other mutual fund schemes, ELSS funds are also managed by recognised asset management companies or fund houses. These are regulated by the Securities and Exchange Board of India and ensure a high degree of transparency and compliance. In this respect, here are a key disclosures that all fund houses must provide when launching a new ELSS fund:
Feature | Details |
Net Asset Value | Daily per unit price of your ELSS investments. |
Assets Under Management | The total value of assets managed by the fund |
Expense Ratio | The cost of managing the fund which is deducted from your returns on an annual basis |
Fund Manager’s Profile | Information about the individuals who are in charge of managing the ELSS |
Sector Allocation | Insights into the sectors and stocks the fund is invested in |
Such disclosures help you make informed decisions that ensure that your investment remains transparent. Additionally, SEBI has recently introduced a unique ARN code system for distributors and advisors. This can be used by investors to raise complaints in case of any malpractice or misrepresentation arises.
Equity linked savings scheme investments are eligible for tax deductions based on the Section 80C of India’s Income Tax Act. You can claim up to Rs. 1.5 lakh as a deduction which largely reduces your taxable income. This makes ELSS not only a high potential wealth creator but also a smart tax saving tool.
If you are looking to grow your wealth while saving on taxes, ELSS is certainly an option to consider. With a shorter lock-in period, flexible investment options, potential for high market linked returns and transparency, it offers advantages that many traditional tax saving instruments do not. So, if you have the patience to wait and let your money grow, ELSS could be your go to option for both long term wealth creation and tax saving.
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ELSS are mutual funds that ensure tax saving benefits according to Section 80C of India’s Income Tax Act. They invest primarily in equities and come with a minimum lock-in period of 3 years.
The mandatory lock-in period is of 3 years but there is no fixed maturity period. You can stay invested for as long as you want such as 7-10 years or even 15 years. This helps maximise your returns.
Investments in ELSS are eligible for a tax deduction of up to Rs. 1.5 lakh per annum under Section 80C, reducing your taxable income and saving on taxes.
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