ELSS funds are equity linked savings schemes that can get you a tax break of up to ₹1.5 lakh under Section 80C of the Income Tax Act. These are tax-saving mutual funds that invest primarily in equities. While ELSS funds are not the only tax-saving investment option available, they trump other options like Public Provident Fund (PPF), National Pension System (NPS) and Tax-saving Fixed Deposits (FD).
Here are 3 primary reasons why ELSS funds are better than other tax-saving investments.
Higher returns over the long-term
Since ELSS funds invest in stocks and have the highest equity allocation among tax-saving investments, they are best placed to earn inflation-beating returns. Over many years, the rate of inflation can eat up the returns that traditional debt-oriented investments earn. Equity is an asset class that holds the capacity to beat inflation. This is how ELSS funds can give you the best of both worlds–high returns and tax saving.
Lowest lock-in period
While traditional tax-saving investments have long lock-in periods, ELSS funds come with a lock-in of only 3 years. In comparison, PPF has a lock-in of 15 years and NPS requires you to stay invested till you retire. The 3-year lock-in of ELSS funds is a major advantage here. Your money doesn’t get blocked for long periods and you enjoy the ability to even stop investing if you don’t need to invest or if a fund is not doing well enough.
Highest amount of flexibility
ELSS funds allow the highest flexibility among all tax-saving investments. In traditional investment avenues, you have to stay invested in one type of option only. But with ELSS funds, you can diversify across different mutual funds and benefit from different investment styles. You can also stay invested in an ELSS fund after the lock-in period expires if you think it is doing well. These tax-saving mutual funds don’t have a maturity date. You can even stop investing in an ELSS fund; there is no compulsion to stay invested for any amount of time.
On a broader level, this is how ELSS funds stand in comparison to other tax-saving investments.
|Investment||Interest or returns||Lock-in Period||Risk Profile|
|ELSS funds||12% to 15% (expected)||3 years||Market-related risks|
|PPF||8.1% (guaranteed)||15 years||Risk-free|
|NPS||8% to 10% (expected)||Till retirement||Market-related risks|
|FD||7% to 9% (guaranteed)||5 years||Risk-free|
|NSC||8.1% (guaranteed)||5 years||Risk-free|
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