ELSS: Is It Really A Top Tax Saver?

Aakash Sharma — Thu, 30 Sep 2021 03:35:08 +0000

The Equity Linked Saving Scheme, or ELSS, is a mutual fund programme that primarily aims to provide tax benefits on stocks market investments. Under the Income Tax Act Section 80C, investments up to Rs. 1,50,000 in ELSS mutual funds are tax-deductible.

The main advantage of ELSS is the shorter lock-up period of three years compared to other tax-saving instruments. This means that you cannot sell your ELSS investments for three years from the date of purchase. However, to get the most out of ELSS funds, keeping your assets for as long as possible is advisable.

If you are a subscriber of an ELSS Systematic Investment Plan (SIP), each plan payment will have a lock-in period of three years. This means that each of your SIP investments will have different maturity dates. Most of the assets of ELSS mutual funds (65% of the portfolio) are allocated to listed equities and securities. They may be exposed to fixed-income entities as well.

ELSS Mutual Funds – a preferred tax-saving option

ELSS offers additional benefits on your invested money by giving tax breaks as well as helping you save money over time. The ELSS investment only has a three-year lock-in period, the least among all tax-saving entities, and has the highest returns under the 80C option.

Features of ELSS fund scheme

Following are the key attributes of ELSS mutual funds.

- Under the Section 80C provision, ELSS funds grant tax deductions up to Rs. 1,50,000 per year.
- The ELSS period is accompanied by a blocking period of three years, with no early departure possible.
- You can invest any amount in ELSS. There are no restrictions, with the exceptions of different limits for individual mutual funds.
- ELSS funds are the only tax-efficient investments that can have inflation-beating returns.
- An investment in ELSS funds can offer you tax holiday and added-value advantages.
- ELSS’s corpus consists primarily of stocks, although they also have exposure to fixed-income securities.

Factors to consider before investing in ELSS

It would help if you considered the following factors while choosing to invest in an ELSS mutual fund:

- Investment perspective

If you choose to invest in an ELSS fund, your plan should include keeping the money in the scheme for at least five years. A long-term investment perspective is imperative for ELSS fund investments as they require a more extended investment period to tackle stock market volatility.

- Returns

You should understand that ELSS funds do not offer a guaranteed return as they are entirely dependent on the performance of the underlying securities. However, an ELSS investment period of more than five years can provide a higher return than any other tax-saving investment opportunity.

- Locking period

As told above, the minimum locking period for the ELSS investment fund is three years. Your investment is closed for three years from the investment date, and you cannot withdraw your money before the end of this period.

Advantages of ELSS Mutual Funds

ELSS advantages consist of the following heads:

- Potentially high yield

Apart from ELSS, where investment returns depend on the market, other 80C instruments such as PPF or FD are capped income products. ELSS can generate significantly more capital in a long-term investment plan over others in the segment.

- Good after-tax income

The long-term capital income arising from ELSS is tax-free up to Rs. 1,00,000. Income above this limit is subject to a 10% tax rate. The mix of lower tax rates and higher returns ensure the best post-tax returns.

- Easy investment

Sustainable ELSS investment is straightforward. It is easy to invest in ELSS through monthly SIP.

Disadvantages of an ELSS fund

Despite its benefits, ELSS has some cons as well, which include:

- The overall benefit is limited

Tax deductions for a given fiscal year are only available up to Rs. 1,50,000 under 80C, regardless of the total amount invested in ELSS funds. For example, if you invest Rs. 15,00,000 in an ELSS fund in a fiscal year, the benefits will only be given on the capped amount of Rs. 1,50,000.

- Tax incentives are limited

The 80C tax incentives on yield up to Rs. 1,50,000 includes all the avenues like PPF, life insurance, mortgage repayment, etc. It means that you can have no tax deduction benefits by an ELSS fund investment if other avenues make the threshold amount of Rs. 1,50,000.

In conclusion, investment in ELSS should be a function of an investor’s risk-return appetite, investment objectives, and investment duration, accompanied by an intelligent understanding of the concept.