Are you looking for a tax-saving investment option that also helps you grow your wealth? Look no further than Equity Linked Savings Schemes (ELSS). Not only do they offer tax benefits, but they also provide potentially high returns through equity investments. Let’s understand with the help of an illustration.
Suppose Mr. Raghav is a software engineer in a multinational company and his package is 10L per annum and now he is exploring some tax saving options to invest in. He is not fond of insurance policies as investment products and he looking for schemes that provides him aggressive returns and he is capable of taking risks. And he is not willing to invest for more than 5 years. So, the most appropriate investment to save tax is he can park 1,50,000 into ELSS funds, where the lock-in period is 3 years. ELSS also has the potential to provide higher returns when compared with other tax saving instruments.
From the table mentioned below we can see that ELSS Funds have the potential to provides higher returns compared to other instruments.
Instruments | 5-Year Bank Fixed Deposit | Public Provident Fund (PPF) | National Savings Certificate | National Pension System (NPS) | ELSS Funds |
Returns | 4% to 7% | 7% to 8% | 7% to 8% | 8% to 10% | 15% to 18% |
Lock-in Period | 5 years | 15 years | 5 years | Till Retirement | 3 years |
Tax on Returns | Yes | No | Yes | Partially Taxable | Partially Taxable |
Investment Risk | Low | Low | Low | Moderate | High |
Let us understand ELSS funds, the benefits they offer and how they can be your ticket to financial freedom.
ELSS is a well-diversified open-ended equity fund. Tax deduction is available under Section 80C of the Income Tax Act. Most of the capital is invested in equity funds. The lockup period applicable to these funds is he three years, after which investors can exit from the scheme.
The table below highlights basic features of Equity Linked Saving Scheme.
Minimum Investment Amount | Rs. 500 |
Maximum Investment Amount | No maximum limit on investment |
Tax Deduction | Investments in ELSS up to Rs. 1,50,000 will be tax-exempt under Section 80C of the Income Tax Act. |
Tax on interest and dividends | Favourable tax treatment |
Risk Parameter | High Risk |
Returns | Depends on market conditions; returns are not guaranteed. |
Lock-in period | 3 years |
Time Horizon | 3 years or longer |
Let us now dive into the advantages and disadvantages of ELSS.
Advantages of ELSS:
- The lock-in period of ELSS is only three years, which is significantly shorter than other tax-saving options.
- ELSSs (Equity Linked Saving Schemes) have the potential to provide a significantly high rate of returns.
- There are no upper limit on the amount that you can invest in an Equity Linked Saving Scheme (ELSS).
Disadvantages of ELSS:
- Choosing the fund in which to invest can be a difficult decision.
- ELSS returns are not assured, as it is an equity mutual fund.
Taxation of ELSS:
From a taxation perspective, ELSS redemption proceeds are partially tax-free. However, only long-term capital gains (LTCG) are considered if the investment has been held for more than his three years. LTCG up to INR 1 Lakh per annum is tax free and profits above this limit are taxed at a rate of 10% plus applicable cess and surcharge.
Conclusion:
ELSS is a great investment option for investors who are looking for saving their taxes and creating wealth.