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Why ELSS is the Best Tax Saving Option Than 80C Investments?

IndianMoney.com Research Team | Updated On Thursday, January 16,2020, 05:09 PM

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Why ELSS is the Best Tax Saving Option Than 80C Investments?

 

 

Understanding Equity Linked Saving Schemes:

ELSS is an open-ended mutual fund scheme that comes with a statutory lock-in of 3 years. The funds are managed by expert fund managers and are offered by almost all fund houses in India. ELSS investments are the only category of mutual funds that offer tax benefits to the investor. You can save a significant amount of money in a financial year by investing in ELSS as it is grouped under section 80C as a tax-saving investment option.

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Though you can invest any amount in ELSS, you are eligible to claim tax deductions for amount only up to Rs. 1.5 lakh in a financial year. The income generated from ELSS is taxable with the dividend distribution tax (DDT). Long Term Capital Gains up to ₹1 lakh from ELSS are also tax-exempted.

See Also: What is an Equity Linked Saving Scheme?

Types of ELSS:

ELSS funds can be categorized into two separate categories. They are:

Growth funds: A growth fund is a diversified portfolio of stocks whose main objective is to appreciate the invested capital with no or little dividend payout. It helps investors create wealth in the long-term. The longer he investment the better returns the investors get through these funds.

Dividend payout: The dividend payout option can further be divided into two categories. Dividend payout is the option which allows the investor to receive regular tax-free dividends. On the other hand, the dividend reimbursement option allows investors to reinvest dividend payments into new investments and strengthen their portfolios.

See Also: Saving Tax through Mutual Fund Investments

 Why is ELSS better than all other 80C Investments?

While considering various aspects of saving and investing money, the first priority of an investor should be to bring down tax outgo. Thus investing in instruments that considerably bring down your tax burden can be wise. While there is several tax saving instruments available under section 80C of the ITA, the equity-linked savings scheme has surfaced as the most practical option for investors.

What makes the ELSS popular among investors? Let’s discuss the reasons and advantages of ELSS mutual funds:

Yields higher rate of returns:

ELSS invests mainly in equities and thus you can expect high returns in comparison to other tax-saving options like PPF or ULIPS, from the perspective of long-term investment. Thus not only you save taxes by investing in ELSS but also make a bigger return on your investment, however, to reap maximum benefits you must invest in ELSS for medium to long-term. While other tax-saving investment instruments give returns in the range of 7-9%, ELSS is known to outperform all and provide returns of 12% for over 10-year of investment period.

Offer significant tax benefits:

ELSS qualifies for tax exemptions under section 80C of the Income Tax Act, 1961. Thus you can claim tax benefits of up to Rs. 1.5 each year on your investment. Furthermore, the capital gains earned through ELSS are tax-free i.e. taxes are not imposed on the maturity proceeds or the income accrued over the years. This is the reason it is the most preferred option among investors.

Short lock-in period:

ELSS has shorter lock-in period in comparison to other tax-saving options listed under section 80C investments. Thus it comes with a 3-year lock-in unlike NSC, FDs, and PPF that comes with a higher lock-in period. Thus ELSS investments allow investors to liquidate their investments easily for reinvestment or to meet financial emergencies.

See Also: Best Investment Plans for Millennials in 2020

Things to know about ELSS before you invest:

  • You may invest in any amount as per your budget in ELSS. However, you can get tax benefits on investments only up to Rs. 1.5 lakh in a financial year under section 80C of the ITA, 1961.
  • Over time ELSS has emerged as the best investment option as it has the potential to fetch high returns and has a lower lock-in period.
  • The long-term capital gains on ELSS investments are tax-exempt for up to Rs. 1 Lakh and the dividend payouts are tax-free in the hands of the investor.
  • You can regularly contribute and invest in this scheme even after the lock-in period. You must invest for medium to long-term to get maximum returns from ELSS investments.
  • The Risk involved with ELSS investments is higher due to equity exposure. As such investors are likely to get much higher returns over the investment tenure as compared to other investment options like FDs or PPF.

You must consider all aspects of the funds and its pros and cons, as well as your investment objective before you make an investment. you can consult an expert to understand how ELSS can be a good investment option for you.

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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