Looking to save tax? Give an ELSS fund a chance – For tax savings & wealth creation

It’s that time of the year when people run around, searching for ways to save tax. In this matter, Section 80 C of the Income Tax Act gets the most amount of attention from investors, as it allows tax exemption through some popular investment instruments. Premiums paid for life insurance policies, investments in Equity Linked Saving Schemes (ELSS), five-year fixed deposits, National Savings Certificates (NSC), Public Provident Fund (PPF) and investment in Sukanya Samriddhi Yojana are some such instruments.

Among these, ELSS has the potential to beat the long-term returns from all other investment options. It also allows you to save tax up to Rs. 1.5 lakh under Section 80 C. Let’s understand what ELSS is and what are the associated benefits through this article.

What is ELSS?
Equity Linked Saving Schemes (ELSS) are open-ended mutual funds with at least 65% exposure to equity. Although there’s a high degree of risk involved in this investment, it is beaten down in the long run. The returns earned through ELSS funds have outperformed other investment instruments in the long run.

According to the CRISIL - AMFI ELSS Fund Performance Index in December 2016, ELSS funds as a mutual fund category have returned 3.35% in the last year, 16.64% in three years, 17.71% in the last five and 10.61% in 10 years.

The minimum investment in ELSS has to be Rs. 500, while there’s no limit on the maximum amount you can put in. ELSS comes with a lock-in period of three years and withdrawal cannot be done before the completion of the stipulated period. On completion of the stipulated period, you can either redeem your scheme or continue with it. Returns from ELSS is tax-free on completion of a year.

Why is ELSS your best long-term bet?
ELSS has proven to be beneficial in terms of saving tax and yielding returns. Following are the benefits of ELSS:

• ELSS allows you to claim tax deduction of up to Rs. 1.5 Lakh under Section 80C of the Income Tax Act. The proceeds on redemption of the scheme after three years of lock-in is also completely tax free.

• Compared to PPFs, NSC and fixed deposits, the lock-in period associated with ELSS is relatively shorter, indicating more liquidity.

• The highest ranked ELSS funds have provided a CAGR of around 20% in the last five years – far more than options such as PPF and NSC which can provide returns in the range of 8-9%. Not just that, your ELSS returns are tax-free.

• This scheme is highly affordable, as the minimum amount you can invest is only Rs. 500. If you don’t have a lump sum amount, you can even invest through Systematic Investment Plans (SIPs), depositing a small amount every month.

• There is no fixed maturity period. Investors can stay invested as long as they want.

• Investors earn dividends even during the lock in period and it is tax free.

• The scheme forces you to stay invested at least for a period of three years without any interruptions. Moreover, if you opt for SIPs, you indulge in a more disciplined saving habit which ensures high capital growth.
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ELSS and other instruments that allow exemptions under Section 80C

Here is a comparative analysis of ELSS and other popular investment instruments: