ELSS funds are tax-advantaged mutual funds that fall under Section 80C of the Income Tax Act, 1961. These funds, which invest primarily in equities and equity-linked securities, provide the highest potential returns of all Section 80C investment options.
When compared to bank FDs, Provident Funds, NSCs, and other tax-saving investment options, ELSS is one of the few tax-saving investments that give you the benefit of Equity Linked Savings Scheme exposure, allowing you to unlock the potential to earn significantly better returns.
Anyone ready to take a risk and get tax deductions of up to Rs 1.5 lakh under Section 80C rules might consider investing in ELSS. These mutual funds are equity-oriented, with a minimum of 60% of their assets invested in stocks and stock-related instruments. To get the best profits from these funds, you must stay invested for at least three to five years.
The taxation of ELSS is similar to that of equity mutual funds. Because these funds have a three-year required lock-in period, the redemption of these funds results in the imposition of long-term capital gains tax.
The easiest method to get the most out of such funds is to invest for the long term. So, at the start of the year, determine your financial goals and invest accordingly through Systematic Investment Plans (SIPs). Investing consistently throughout the year can help you lower your market risk and grow wealth over time.
Advantages of ELSS Mutual Funds –
- The ELSS has the shortest lock-in time, which is three years. Tax-saving fixed deposits have a five-year lock-in period, whereas PPFs have a 15-year maturity period. Overall, ELSS provides higher liquidity in the medium run.
- Unlike ELSS, which has a market-linked return, other 80C assets such as PPFs and FDs are fixed income products. In a medium to long-term investing horizon, ELSS has the potential to generate significantly more wealth.
- Better after-tax returns: Long-term capital gains from ELSS are tax-free up to a limit of 1 lakhs. 10% tax is applicable on the gains above Rs. 1 lakh. Lower tax rates combined with larger returns result in the best post-tax returns.
- Investing on a regular basis is simple and convenient: Investing in ELSS funds is simple with a monthly SIP.
- These funds, like any other market-linked mutual fund, are vulnerable to the hazards of the stock market. However, you can reduce this risk by taking a long-term strategy to invest in an Equity Linked Savings Scheme.
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