The end of the financial year is tax planning time. One of the best ways to reduce your tax liability is through Section 80C deductions, which allow up to Rs 1.5 lakh of tax-exempt investments. Many instruments, like PPF, NPS, FD, NSC, etc., qualify for 80C benefits. However, the Equity Linked Savings Scheme (ELSS) stands apart thanks to its unmatched features. Let’s explore why ELSS schemes may be useful tax-saving investments.
In addition, the joint benefit of tax-saving and wealth creation make ELSS funds a preferred tax-saver option. As an equity mutual fund, it allows you to earn market-linked returns while enjoying deduction benefits. Though ELSS carries risk, its power of compounding and long-term growth potential make it worth considering.
Key Features of ELSS Funds
Here are the salient features of the ELSS scheme that make it a preferred tax-saving fund:
- Diversified equity exposure: They invest in equities across market caps and sectors.
- Professional management: Fund managers have the expertise to manage your equity portfolio.
- Growth potential: As an equity fund, it also targets inflation-beating returns over the long term.
- Low lock-in: Provides tax benefit with only 3 years lock-in compared to 15 years for PPF.
- Liquidity: Through open-ended structure, unlike FDs.
Additionally, they provide easy entry and exit based on Net Asset Value. They are flexible in the amount and frequency of investments. In addition, you can invest in lumpsum or via SIP. They also provide transparency via regular fund reporting and disclosures.
Benefits of Investing in ELSS
Here are the key benefits of using ELSS as a tax-saving investment:
- Section 80C deduction: Offers annual tax deduction up to Rs. 1.5 lakhs under Sec 80C for tax planning.
- Long-term wealth creation: ELSS is an equity fund that targets market-linked returns of 12-15% over long periods.
- Compound growth: Investing early and regularly may also benefit from compounding over the long term.
- Low lock-in: ELSS has the lowest lock-in of 3 years among 80C options, enabling greater liquidity.
- SIP investments: Invest small amounts regularly via Systematic Investment Plans for disciplined investing.
- Wealth creation with tax saving funds: Earn inflation-beating returns while enjoying tax deductions, giving higher post-tax earnings.
Choosing the Right ELSS Fund
Focus on these parameters while selecting the best ELSS scheme for you:
- Long-term performance: Analyze returns over 5 and 10-year time frames.
- Portfolio composition: Check sector and market cap allocation.
- Fund management team: Choose funds with experienced fund managers and research analysts.
- Costs: Compare expense ratio between funds. Lower is better.
- Fund house reputation: Select established and trusted mutual fund houses.
- Investment objective: Pick funds that align with your goals, time horizon, and risk tolerance.
Conclusion
ELSS schemes are a smart choice to earn tax savings while allowing your money to grow. The combination of tax planning, wealth creation, low lock-in, flexibility, and transparency make them an ideal tax-saving instrument for savvy investors. Consider allocating a portion of your Section 80C investments towards ELSS funds this financial year for benefits that can last a lifetime.