Have you ever wondered why ELSS funds are known as the best tax-saving investment option? ELSS is known to be an effective investment instrument not only for seasoned investors but also for beginners.
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Let’s look into the benefits of ELSS to examine the truth of the above line:
Let us first discuss the benefits offered by the ELSS investments:
ELSS mutual funds offer tax benefits to investors under section 80C of the Income Tax Act, 1961. Investors can avail tax benefits of up to Rs. 1.5 lakh per annum for investments made under the ELSS funds.
An additional benefit is that investors who belong to the highest tax bracket can also avail the same tax benefits by investing in ELSS funds. Also, the returns generated from ELSS investments come with tax benefits. A withdrawal amount up to Rs. 1 lakh is also fully tax-exempted.
All long term investment comes with a lock-in period. Investment options like PPF, NSC or ULIPS come with varied lock-in periods. Most of these investments offer you a lock-in period of a minimum of 5 years and above but ELSS investments come with a lock-in of 3 years only. A lower lock-in means you can access your funds relatively faster than other investment options. While the lock-in ensures stability in your investment portfolio and aims at generating healthy returns, a lower lock-in period ensures greater liquidity of funds.
See Also: How Mutual Funds Work?
The lock-in feature of ELSS funds helps you avail some other benefits like long term capital gains. The ELSS stands for equity-linked savings schemes, means much of your capitals are primarily invested in the stock market. Therefore, this kind of equity investment is susceptible to share market volatility. Due to the risk factor, the chances of getting better return increases.
The market risks are equalized by the ELSS funds by helping the investor generate higher capital by using the power of compounding and the rupee cost averaging. This is the reason ELSS funds are believed to be the best tax-saving tool that offers high returns.
ELSS funds can be used to gain dual benefit. It helps you to save money regularly and enable capital growth. Making regular investments in ELSS funds will help you get much higher returns, unlike savings account that provides very low returns. However, the returns on ELSS are dependent on share market fluctuations as these funds mainly invest in equities. But ELSS is a popular investment option as it is known for generating high returns along with giving tax benefits to the investor.
Saving money with dedication and regularity will ensure your effort goes a long way in securing your financial future. A small contribution towards your ELSS account will enable you to accumulate a robust corpus over a long tenure. This way you will be able to save for your future goals or can use the money for fulfilling your aspirations.
The ELSS works in a similar fashion like SIP, where you have to contribute a specific amount each month. This way these funds help you reap the benefits of savings along with investment.
The discussion above makes it obvious that ELSS investment exceeding above Rs. 1.5 lakh are not eligible for tax exemptions under section 80C of the Income Tax Act, 1961.
So, the main question is, should you invest something beyond this amount even if you cannot avail tax benefit on it?
The answer is, ELSS investments come with a lock-in period of 3 years and you will not be able to get any special tax benefits on surplus investments other than the standard tax benefit under section 80C.
Here is how you can decide:
ELSS funds have a 3-year lock-in period, unlike diversified equity funds. Diversified equity funds generate high returns over a long tenure without any lock-in period. By investing in diversified equity funds you will have the flexibility to move your funds and invest elsewhere depending on your financial goals, risk appetite and the market volatility. Through this type of investment, you will be able to achieve a relatively higher growth, unlike ELSS through disciplined savings.
See Also: How Mutual Funds Work?
The core of the matter is that the investor is not going to benefit much for investing an amount higher than Rs. 1.5 lakh in ELSS.
Further, it exposes the investor to liquidity risks without providing equivalent returns when compared to diversified equity funds. Therefore as an investor, it is better to invest your surplus funds in diversified equity funds rather than ELSS. It will help you to rebalance your portfolio as you are no longer tied to a particular fund due to lock-in periods.
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