Investments help in wealth creation through returns and compounding. Moreover, they aid in tax savings. ELSS or equity-linked savings scheme is one of the tax-saving investments available for investors.
What is ELSS?
ELSS is the only mutual fund eligible for tax deductions as per Section 80C of the Income Tax Act, 1961. These funds invest a major portion of their corpus into equity or equity-related instruments. Some of their allocations are also into fixed-income securities. The lock-in period for these investments is three years, the shortest among all Section 80C investments.
Features of ELSS
Experienced financial professionals known as fund managers manage ELSS mutual funds. Here is a list of the features of ELSS:
- Market-linked returns
ELSS exposes a significant portion of its corpus to equity markets. Thus, its return potential is much more than debt investments. It also helps in beating inflation. While there is no guarantee of profits in the long term, ELSS can perform better than other fixed-income investments.
- Tax deduction
ELSS is the only fund eligible for a tax deduction. You can claim a tax rebate of up to Rs. 1,50,000. This means that when you invest in ELSS mutual funds, you can save up to Rs. 46,800 per year.
- Shortest lock-in period
ELSS has a minimum lock-in period of three years. This is the lowest lock-in period compared to other tax-saving plans under Section 80C.
- No maximum limit
Some tax-saving investment schemes permit a maximum amount that you can invest in a year. There is no cap on the amount when it comes to ELSS. But you can claim a tax deduction on only up to Rs. 1,50,000.
You can invest in ELSS in a lump sum or through SIP. As a result, investors have the flexibility of choosing the right mode of investment.
Generally, ELSS funds invest across a diverse range of companies, from large caps to small caps in different sectors. When compared with investments in debt instruments or pure equities, ELSS gives investors better exposure to multiple industries.
How is ELSS better than other 80C investments?
According to experts, ELSS funds are one of the best tax-saving options. This holds true even after the introduction of the new tax regime, which applies a tax on Long-Term Capital Gains from ELSS. Equity-linked saving schemes have a vital role to play in your portfolio. They have the potential to offer higher returns with investments in equity-linked instruments. These mutual funds are an ideal choice for the long term.
Despite its returns being taxed, ELSS still has higher post-tax returns than all other 80C investment options like ULIPs and Public Provident Funds (PPFs).
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