An investment works the best when there is a goal attached to it. A goal gives your investment a direction and makes the decisions related to it easier. For instance, if you are building a retirement corpus and a bear hits it, you could wait till the bear run ends because there might be a long way to go before you retire, and by that time, the market would have corrected, and your investment would rise. But if your investment was for a shorter term, you might want to act quickly to mitigate the effects. But what if the goal of your investment is to save taxes? Is there an option for that? Let us examine.
Section 80C
Most tax-saving investment options come under section 80C of the income tax act. Under this act, you can save taxes for up to Rs.1.5 lakh that you spend on investment. But not all investment options have this luxury. Furthermore, most investment options that come under 80C have more extended lock-in periods and lesser return potential. One exception to this is ELSS or equity-linked savings scheme. It is the only market-linked savings scheme that comes under section 80, with which you can save tax.
What is an equity-linked savings scheme?
As the name suggests, ELSS is an equity-based investment scheme. It is a mutual fund but with a focus on equity investments and tax savings. The equity portion on an ELLS fund can go up to 80%, making it an extremely aggressive investment option.
As said above, the fund comes under section 80C of the income tax act of India. That means you can save up to Rs.1.5 lakh in income tax. Through this, you can save a maximum of Rs 46,800 a year in taxes.
But the advantages of investing in ELSS don’t end there. So let us take a look at some of the top advantages of ELSS other than its tax-saving part.
Lower lock-in period
One common factor among the tax-saving investment options is the higher lock-in period. For example, a tax-saver fixed deposit has a lock-in period of five years. Here, if you withdraw your funds before the lock-in period, there will be a penalty charge, and you will also lose all your tax-saving benefits. In addition, if you have claimed tax benefits before, you will have to repay them too. But ELSS comes with a much lesser lock-in period of just three years. One significant difference here is that ELSS doesn’t give you the option to withdraw your fund at all before the term, unlike an FD, where you can do the same while bearing some charges.
Higher returns
Another common characteristic of most tax-saving investment options is their comparatively lower returns. This is mainly because most of the options are not market-linked but interest-based. Historically, market-linked investment options tend to give you more returns than interest-based ones. ELSS has an edge here too. Furthermore, since they are focused on equity funds investments, they tend to have a higher return potential among similar funds as well. But one important thing to understand here is that there is more risk for market-linked investments. Hence, making sure your risk appetite is large enough to accommodate ELSS becomes necessary before investing.
Bottomline
ELSS funds are an excellent dual-advantage option to both appreciate your capital and save some tax while you are on it. Make sure you approach an investment expert and figure out your investment horizon and risk appetite before investing if you haven’t yet.