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

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ELSS funds are an efficient way to save taxes as compared to all the other investment options available under Section 80C of the Income Tax Act. Along with wealth creation, you get the advantage of a shorter lock-in period and professional fund management. 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

It is good to have a clear understanding of what Equity-linked saving scheme (ELSS) actually is to decipher just why it is a better investment than the other 80C investments. These are funds that are managed by experienced finance professionals and are offered by fund houses. This means that your investment is handled by fund managers with the benefit of tax savings.

ELSS has been one form of investment providing tax benefits under Section 80C of the Income Tax Act where one can invest up to INR 1.5 lakh in a financial year. You are free to invest more than this designated amount, but the excess over INR 1.5 lakh will not qualify you to avail the tax benefits under Section 80C.

With the Budget announcement, it was revealed that the return generated from ELSS would become taxable with the dividend distribution tax and taxes on Long-Term Capital Gains (LTCG). Despite this change of scenarios, ELSS continue to dominate as the preferred option for all other 80C investment.

2. Types of ELSS

There are two main categories of funds in ELSS; dividend fund and growth fund.

a. Growth Fund is long-term wealth creation platform for investors where the full value of the fund is realized at the time of redemption.

b. Dividend Payout has further two categories of Dividend Payout and Dividend Reinvestment. Unde the Dividend Payout option, you will receive the dividend tax-free. In the case of Dividend Reinvestment, your investment will be reinvested as a fresh investment.

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

Despite the new tax regime that calls for taxation of 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. You should not let go of ELSS as they play a significant role in your portfolio. These pure equity-based instruments carry the potential for higher returns and are an ideal choice of investment for the long term. ELSS holds its ground, even with its returns being taxed, with greater post-tax returns than other 80C investment options like Public Provident Funds and Ulips.

a. Higher Returns on Investment (ROI)

Given the investments in ELSS are made in the equity markets, the returns are much higher than most investment options with tax saving benefits in the longer run. This serves two purposes; Apart from saving you taxes, these funds also generate higher profits for you. It is a better option for you than any other 80C investment option if you are willing to invest for a medium to long duration.

Empirical evidence indicates that ELSS generates about 12% and over in a period of 10 years and more. This, when compared to the 8 percent returns of the PPF, is a significant gain. Even returns from NSC and Life Insurance Schemes have taken a slight slump of late.

b. Shorter Lock-in Investment Tenure

Equity Linked Saving Schemes when compared to other tax saving investment options have a lower lock-in period. This means unlike a Public Provident Fund, National Savings Certificate and Employee’s Provident Fund, all of which require a minimum of 5 years lock-in period, ELSS is a better bet with just 3 years of commitment.

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. But what a ULIP doesn’t give you is the flexibility of ELSS. If you are unhappy with your ELSS fund, 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 in the tax advantage under Section 80C is a that it can be coupled with PPF for greater benefits. This combination is a solid ground to uncover the stability that is offered by the PPF and the earning potential of the 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 a government-backed security and you have the opportunity of growth through equity.

e. Protection in times of volatility

ELSS often are the first point of engagement for investors when it comes to investment. Many people start with these funds and then graduate 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 but the even better part about these funds is that they are a strong shield to weather the volatility that comes 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 but it is only contributions of up to INR 1,50,000 that are tax-exempt under the Income Tax Act, Section 80C.
  • It is one of the best investment options that offer tax benefits with potentially higher returns and short lock-in periods.
  • 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 3 years.
  • The risk involved with ELSS is higher when compared to a Fixed Deposit or a PPF but the returns are potentially higher as well.
It is important to consider all aspects of the funds as well as your investment objective before parting with your money. Consult an expert, or visit ClearTax to sample the top funds that have been handpicked by financial experts that range from high risk to medium and low. There is something for every risk profile and you can choose what best meets your financial requirements.  

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