The tax season always leaves people dazed and confused as they have to set aside all their other activities to sit and wonder where to invest their money so that they can bring down their tax liability. But wouldn’t it be great if you start your tax saving journey right at the beginning of the fiscal year instead of rushing to the last minute decision which may or may not be the right one.
If you want to save tax and at the same time generate capital appreciation over the long term then you can consider diversifying your investment portfolio with Equity Linked Savings Scheme.
What is Equity Linked Savings Scheme?
Also referred to as ELSS, Equity Linked Savings Scheme is a mutual fund scheme that comes with a tax benefit. This is an equity mutual fund scheme which means the ELSS invests anywhere between 65 to 80 percent of its total assets in equity and equity related instruments of publicly listed companies. Since the fund is not confined to investing in any specific market cap, the ELSS fund invests in companies across market capitalization.
What makes ELSS a better tax saving option?
Short lock-in period
As per Section 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1.5 lacs every fiscal year in ELSS and seek tax exemption on this investment sum. Although there are other tax saving instruments under Section 80C ELSS has the shortest lock-in period of them all. If you consider other tax saving instruments like PPF or bank FDs, they can have a lock-in period spanning anywhere between 5 to 15 years. By investing Rs. 1.5 lacs, investors might be able to save up to Rs. 46,800 in taxes.
Achieve long term financial goals
Traditional tax saving instruments are currently offering extremely low fixed interest rates. With such low rates, one might not be able to achieve any of their financial goals. Also, since they have a longer lock-in period, one may not be able to liquidate the investments in case of an emergency and even if they do, there’s usually a penalty involved. Also, none of the traditional tax saving instruments have been able to generate returns like ELSS. Historically ELSS has always outperformed all its peers in the long run and delivered 12 percent to 15 percent returns. Thus, anyone who has long term financial goals like building a retirement corpus or buying a new house, or any other financial corpus that requires them to build a large corpus, can consider ELSS to target such goals.
Investors can start a SIP in ELSS
To invest in a tax saver fund like ELSS, investors need not have a large capital at their disposal. They can start investing with small amounts through SIP. A Systematic Investment Plan (SIP) is an investment tool that allows retail investors to save and invest a fixed sum in mutual funds regularly. Through SIP, investors can even start small by investing an amount as low as Rs 500 every month in ELSS and save tax. If you want to know the assumed returns which you might earn through SIP investing, you can also use the SIP calculator.
Exposure to equity market
ELSS is the only mutual fund scheme that comes with a tax benefit. Since it invests in a basket of securities, investors get access to a portfolio of potential multi-bagger stocks through one single investment. This way, their portfolio tries to generate risk adjusted returns from time to time while the invested sum also gives tax benefit to the investor.
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