Over the years, the Government of India has taken significant steps in promoting the healthy habit of investing, by pairing it with the advantage of tax benefits.
Keeping this in mind, the government decided to set up a different class of mutual fund schemes called the Equity Linked Saving Schemes or ELSS. This class has become one of the most popular products of tax-saving among informed investors.
The ELSS mutual funds have the following features –
- ELSS funds are made from equity and equity-related instruments.
- The amount that we contribute to any ELSS scheme is eligible for deduction under section 80C of the Income Tax Act, 1961.
- The maximum deduction for ELSS schemes is Rs. 1,50,000. This means that whatever investments that you make in such schemes will be entirely eligible for deduction, provided that the total amount doesn’t exceed Rs. 1,50,000.
- The schemes have a lock-in period of three years. This means that once investors deposit any funds in these schemes, they cannot withdraw those funds for the next three years.
- An ELSS scheme combines tax-saving with all the benefits of mutual funds.
- There are no limits set on the amount of investment we can make in an ELSS scheme. We can also choose to invest in multiple ELSS schemes together.
- Investors have a wide range of mutual fund schemes to choose from in this class. They can choose from any of these schemes depending on their risk appetite.
It is clear from these features that the ELSS class is a unique set of investment products.
The important question here is, why should we choose an ELSS scheme over the different tax-saving pension programs of the government?
Let us discuss the answer to this through understanding the top five reasons why any of us should invest in ELSS schemes.
1.Low Lock-In Period
A lock-in period is the amount of time for which no exit is allowed from the scheme. This means that once we have begun our investment, we cannot withdraw any amount from it till the lock-in period is over.
While the tax-saving products like the NPS and the PPF have a lock-in period ranging from 15 years to the point of retirement, the ELSS scheme provides the same tax benefits with a lock-in period of only 3 years.
This low lock-in period has two advantages.
Firstly, this scheme is a great way for newcomers in the stock market to learn more about making investments and save tax at the same time.
This is because a lock-in period like this will teach them the importance of holding onto investments and not withdrawing them at the time of a recession in the stock market.
Secondly, this lock-in period makes the scheme a lot more flexible than the other investment options. Therefore, beginners can deposit some money in these schemes and learn about the behavior of the stock market in the meantime, and once the lock-in period is over, they can phase out their investments from the ELSS scheme and make other investments as per their liking.
2. Flexibility of Investments
The tax-saving options like the NPS and PPF allow the set-up of only one account per person.
On the other hand, there is no limit on the amount of ELSS schemes you can invest in, as long as your investments don’t exceed Rs. 1,50,000 per financial year.
This choice of ELSS schemes makes this tax-saving option very attractive and flexible.
With the choice of an entire class of mutual fund schemes to choose from, new investors can learn how to make informed investment decisions by trying out the different schemes available.
Also, with a small lock-in period, investors can keep shuffling their investments around as and when they need to, thus giving them the flexibility of investing choices as well
3. The Benefits of Mutual Funds
At its core, an ELSS scheme is a mutual fund. Therefore, the ELSS schemes can provide investors with all the advantages of mutual fund investment, along with the benefit of tax deductions.
Some well-known advantages of mutual funds include –
- Professional fund management;
- Simple way to begin investments;
- Wide range of options; and
- Portfolio diversification.
Investing in any ELSS scheme will expose your funds to all these advantages as well.
4. Long Term Equity Investments
An interesting feature of the schemes of the ELSS category is that all these schemes are built with equity and equity-related instruments.
What does this mean for the investors?
Usually, equity investments are known to generate long-term returns which can also beat inflation. Therefore, when you invest in an ELSS scheme, you will also have an opportunity to earn great returns while getting good tax deductions.
5.The Benefits of SIP investments
An SIP, or a Systematic Investment Plan, is a system of investing in mutual funds in which we can deposit small but fixed amounts at regular investments to build a pool of investment in a mutual fund scheme.
This method of starting investments in mutual funds is a great way to build the healthy habit of regular investments, and now, investors can develop this habit with the advantage of tax deductions.
Since the ELSS category of funds are mutual funds in general, investors can choose to build an SIP on the fund and become eligible for tax deductions at the same time.
Of course, it is essential to remember that only the first Rs. 1,50,000 of the total investment in the scheme for the financial year will be eligible for deductions.
Therefore, since SIPs require small amounts to function, an investor can choose a variety of schemes from the ELSS category and set up separate SIPs for all of them as well, thus getting deductions and making multiple investments at the same time.
Mutual funds are a very popular alternative of investment, and with a class of funds like the ELSS schemes, this popularity is bound to grow even more.
With the advantages that we have discussed, it is clear that these funds are the perfect balance of efficient tax planning and long-term investment.
Thank you for reading the article. Happy learning!