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ELSS vs Other 80C Investments – Why ELSS is the Best Tax Saving Option?

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Investing in ELSS funds are an efficient way to save taxes when compared to the other investment instruments available under Section 80C of the Income Tax Act, 1961. ELSS comes with the advantage of a shorter lock-in period and professional fund management, which can lead to wealth accumulation. We have covered the following in this article:Learn more about the other aspects of ELSS funds in this article.
  1. Understanding Equity Linked Saving Schemes
  2. Types of ELSS
  3. Why is ELSS better than all other 80C Investments
  4. Things to know about ELSS before you invest

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1. Understanding Equity Linked Saving Schemes

ELSS mutual funds are managed by experienced finance professionals called fund mangers and are offered by almost all the fund houses in India. ELSS mutual funds are the only class of mutual funds eligible for tax deductions. You can save up to Rs 46,800 (tax deductions of up to Rs 1,50,000) a year in taxes by investing in ELSS, which is covered under Section 80C of the Income Tax Act, 1961. However, you can invest more than this designated amount, but the excess over Rs 1.5 lakh will not qualify you to avail the tax benefits as per the provisions of Section 80C. The returns generated from ELSS are taxable with the dividend distribution tax (DDT) and taxes on Capital Gains (LTCG). Tax on long-term capital gains (LTCG) was reintroduced in the Union Budget 2018-19. Despite the change, ELSS has continued to dominate as the most preferred option among all Section 80C investment options. a>

2. Types of ELSS

ELSS funds are broadly classified into dividend funds and growth funds. a. Growth Fund is long-term wealth creation platform for investors where the full value of the fund is realised at the time of redemption. b. Dividend Payout has two sub-categories – Dividend Payout and Dividend Reinvestment. Under the Dividend Payout option, you will receive tax-free dividends. In the case of Dividend Reinvestment, your dividends will be reinvested as a new investment. ELSS funds

3. Why ELSS is better than all other 80C Investments

Despite the new tax regime, i.e. tax on Long-Term Capital Gains from ELSS, these funds, in the opinion of experts, still, hold their place as one of the best tax-saving options. ELSS can play a significant role in your portfolio. These equity-linked instruments have the potential to offer higher returns and are an ideal choice of investment for the long term. ELSS holds its ground, even with its returns being taxed, with higher post-tax returns than any other Section 80C investment options such as Public Provident Funds (PPFs) and ULIPS.

a. Higher Returns on Investment (ROI)

Given that ELSS invests predominantly in the equity instruments, the returns are much higher than most investment options with tax-saving benefits in the longer run. This serves two purposes; you not only save on taxes but also generate high returns/profits. ELSS can be the right choice for an individual who is willing to invest for a medium to long duration. Historical performance shows that ELSS generates about 12% over ten years and more. This, when compared to a mere 8% returns offered by PPF, is a significant gain.

b. Shorter Lock-in Investment Tenure

ELSS has a lower lock-in period. Unlike the PPF, NSC and EPF, all of which requires a minimum of five years lock-in period, ELSS is a far better option with just three years of lock-in.

c. Flexibility with ELSS

It is possible that your ULIPs, which were sold to you at a low cost through insurance firms directly, generate returns similar to that of an ELSS in the longer run. However, what a ULIP doesn’t offer is the flexibility of ELSS. If you are unhappy with your ELSS fund, then you may move to another fund as you are not required to commit to a multi-year deal. In the case of a ULIP, if you are unhappy with the fund, you can only shift and invest in funds that are offered by that ULIP.

d. The advantages of Combining ELSS and PPF

Another clear advantage that ELSS enjoys over its counterparts is that it can be coupled with PPF for more significant benefits. This combination is a solid ground to uncover the stability offered by PPF and the earning potential of ELSS. If you see closely, you find out that there are further advantages to this arrangement; your portfolio is well diversified with a mix of debt and equity, you have the safety of government-backed securities with an opportunity to grow through equities.

e. Protection in times of volatility

ELSS mutual funds are often the first point of engagement for investors when it comes to investing in equity-linked investments. Many equity investors start off their investments in equity-linked investment with these funds and then go on to investing in equity mutual fund schemes. It helps to build discipline, given that you can’t touch the fund for the lock-in period of three years. These funds also act as a strong shield to weather the volatility that may come with investing in stock markets. The scheme not only benefits from the market highs but also has provisions to lessen the impact of the lows.

4. Things to know about ELSS before you invest

  • You may invest any amount you like in an Equity-Linked Savings Scheme. However, investments only up to Rs 1,50,000 a year are tax-exempt under Section 80C of Income Tax Act, 1961.
  • It is one of the best investment options that offer tax benefits with potentially higher returns and short lock-in period (3 years).
  • The Long-Term Capital Gains on ELSS are tax-exempt up to Rs 1 lakh, and dividend received is tax-free in the hands of investors.
  • You can continue to invest in this scheme even after the completion of the lock-in period of three years.
  • The risk involved with ELSS is higher when compared to a fixed deposit or PPF, but the returns have the potential to be more elevated.
It is essential to consider all aspects of the funds as well as your investment objective before you make any investment. Consult an expert or visit ClearTax to invest in the top funds that are handpicked by experts. There is something for every risk profile, and you can choose what best meets your financial requirements.  

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