Equity Linked Savings Scheme— Save tax while investing

Are you looking for a way to save on your taxes while potentially earning higher market returns? If so, then an Equity-Linked Savings Scheme (ELSS) might be the perfect investment option for you!

This is the 3rd part of the series Equity Mutual funds. Find part1 and part2 of the series here if you are new to mutual funds and don’t know where to begin.

One of the major advantages of investing in an Equity-Linked Savings Scheme (ELSS) is that it offers tax benefits under Section 80C of the Income Tax Act in India. ELSS is a type of mutual fund that invests mostly in equities which allows investors to save on taxes while also investing in the stock market. Investors can claim a deduction of up to INR 1.5 lakhs per financial year on their ELSS investments. This makes it an attractive option for individuals looking to save up to Rs 46,800 on their taxes while also potentially earning long-term returns through stock market investments

Who should invest in ELSS?

ELSS funds are suitable for investors who have a moderate to high risk tolerance and a long-term investment horizon. The stock market can be volatile in the short term, and ELSS funds carry the risk of potential losses. However, over the long term, ELSS funds have the potential to generate higher returns compared to other tax-saving investment options such as bank fixed deposits and National Savings Certificates.

Who should not invest in ELSS?

It is important for investors to carefully consider their risk tolerance and investment horizon before deciding to invest in ELSS. Those with a low risk tolerance or a short-term investment horizon may prefer to consider other tax-saving options that offer lower risk and shorter lock-in periods such as National Pension scheme, Public Provident Fund. Both of these schemes also provide tax benefits under Section 80CCD and 80C, respectively.

Why should one invest in ELSS?

ELSS funds are similar to multicap mutual funds, so why consider investing in ELSS? Since the investment in ELSS is directly linked to your income levels, it will be a continuous, long-term investment as you will lose money in taxes if you choose to opt out of it. Hence, you will automatically be setting aside a certain amount of money every month. By staying invested for a long time and consistently in the market, you can also potentially earn higher returns and mitigate risk.

Lock-in period:

One of the key features of ELSS is its three-year lock-in period. This means that investors are not able to withdraw their investments before three years have passed from the date of investment. The lock-in period for ELSS is shorter compared to other tax-saving options such as the Public Provident Fund (PPF) which has a lock-in period of 15 years and National Pension Scheme (NPS) which has approximately 35+ years (funds can only be partially withdrawn once you reach age 60).

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Risk:

ELSS funds carry the risk of potential losses due to their exposure to the stock market. However, they also have the potential to generate higher returns compared to other tax-saving options over the long term. It is important for investors to carefully consider their risk tolerance and investment horizon before deciding to invest in ELSS.

Returns:

On an average equity mutual funds provide 13–15% CAGR.

How to invest in ELSS?

There are several ways in which Indians can invest in ELSS:

• Through mutual fund providers: Investors can choose to invest in ELSS through mutual fund providers such as HDFC, ICICI, and SBI, among others.
• Online platforms: There are several online platforms such as mutual fund apps and websites that allow investors to easily invest in ELSS. Zerodha or Groww are the top choices among individuals.

Points to consider before investing:

Before investing in ELSS, it is important for investors to consider factors such as the fund’s performance, expense ratio, alpha and beta of the fund and also the holdings of the fund. If you need more details on the above terminologies or how to evaluate a fund, please refer this article on Equity Mutual funds — How to choose the right one.

It’s important to note that there are other schemes and investment options that provide tax benefits under Section 80C, in addition to ELSS. For example, if you are paying for an LIC insurance policy or paying off an education loan, or investing in a Public Provident Fund (PPF), you can still claim them for tax exemption under Section 80C. Therefore, you should keep in mind that the total amount you claim for tax exemption should be equal to or less than INR 1.5 lakhs. Additionally, you can claim an additional INR 50,000 for investing in the National Pension Scheme (NPS) under Section 80CCD, which is also a sub-section of 80C.

Conclusion:

In summary, ELSS is one of the best tax-saving investment option that allows Indians to save on their taxes while also providing higher market returns. One can choose to invest in ELSS after understanding the risk and lock-in duration.