ELSS now has LTCG. Is it still the best tax-saving option?

The long-term capital gains exceeding Rs 1.25 lakh a year on equity-oriented funds are taxable at 12.5%, with no indexation benefit. This means the ELSS investors should now account for LTCG tax before redeeming their investments. If you are worried that a substantial part of your future gains will go into paying taxes, you need not worry. Despite the tax burden on LTCG, ELSS is still one of the best wealth accumulators in the long run.

ELSS Still the Best Option for Retail Investors

For retail investors (individual investors), ELSS is an excellent investment product for saving taxes and has the potential to offer double the inflation-beating returns over time. ELSS is a tax-saving mutual fund that qualifies for the Section 80C tax deduction up to Rs 1.5 lakh per annum under the Income Tax Act, 1961. It has a lock-in period of just three years, which is the shortest among all other Section 80C investment options. 

You may consider investing in ELSS through the systematic investment plan or SIP. It helps you invest fixed amounts of money regularly in the ELSS. You may invest as low as Rs 500 per instalment in the ELSS through the SIP. 

Wondering If You Should Shift to a Unit Linked Insurance Plan (ULIP)? Think Again

A unit-linked insurance plan (ULIP) offers the twin benefits of life insurance and investment. It has a lock-in period of five years. However, ULIPs have a low mortality cover, and you are better off availing yourself of a term life insurance plan, a pure life insurance policy. Moreover, ULIPs have higher charges in the initial years, which are deducted from the plan's premium paid. 

You shouldn’t mix insurance with investment. It helps if you invest in ELSS to save tax and for inflation-beating returns, provided it matches your risk profile. You may consider a term life insurance plan that offers higher mortality coverage for life insurance needs.

ELSS has High Flexibility

ELSS is a better option for investors who prefer greater flexibility in their investments than ULIPs. Under ELSS, you can change your plan or shift to a different fund if you are unhappy with the current one. This is not the case when investing in ULIPs. You can only change from one fund to another within the same unit-linked insurance plan. For instance, you may change from an equity fund to a debt fund or vice versa under the same plan. Moreover, ELSS has a lower lock-in period of three years than five years for the ULIP.

Choose the Option with Taxable Returns That Performs Better

You must have noticed that after the LTCG tax announcement on equity-oriented funds, many insurance companies pitched life insurance policies as a suitable alternative because of the tax-free returns. However, you must only choose an investment to attain financial goals if it matches your risk profile. It helps if you don’t mix insurance with investment. 

If you are an aggressive investor, you could invest in ELSS for tax saving and inflation-beating returns despite the tax on long-term capital gains. You must avail yourself of a life insurance plan for mortality coverage and not for returns. Moreover, the returns from life insurance plans such as ULIP may be lower than those from ELSS despite the tax-free benefit. 

What Does ELSS Mean for Me?

You may continue with ELSS investments to attain your investment objectives if it matches your risk tolerance. It remains one of the best investments, offering the twin benefits of tax saving and inflation-beating returns. Moreover, it has the shortest lock-in period among all tax-saving investments under Section 80C. It helps if you invest in ELSS through the SIP, where you may invest as low as Rs 500 per instalment.

The higher the Holding Period, the Less the Blow of the LTCG Tax.

You may continue with ELSS investments even beyond the three-year lock-in period, as they help you attain your long-term financial goals. ELSS has the potential to offer double-digit returns over the long run, coupled with the benefit of tax savings. 

ELSS is an excellent tax-saving investment if you are in the higher income tax brackets, as it helps you save up to Rs 46,800 per annum in taxes. Moreover, ELSS invests predominantly in stocks and is one of the only equity-oriented investments that enjoys Section 80C tax benefits up to Rs 1.5 lakh per annum. 

You may invest in ELSS for the long run as it is a good tax-saving investment. It helps as ELSS is a good investment first and a tax-saver later, one of the main characteristics of a good tax-saving plan. It remains an excellent investment in the long term despite the 12.5% LTCG tax on gains above Rs 1.25 lakh per annum. 

Can I Combine ELSS and PPF?

You may consider investing in PPF and ELSS to save taxes under Section 80C. The combination works well as ELSS may offer double-digit returns over time, and PPF offers one of the highest returns among fixed-income investments. You get three advantages by doing this.

• PFF allows you the safety of a government-backed investing option
• The portfolio has a well-allocated mix of equity and debt
• The equity offering drives the growth potential of the portfolio

Conclusion

ELSS is still one of the best tax-saving options, with a higher potential to offer returns than a fixed deposit, PPF, or ULIP.