In today’s time, if you want to save tax and create wealth at the same time, there is no better way than doing it through Equity Linked Savings Scheme (ELSS). If you take a look at the historical data, ELSS has outperformed every other tax saving instrument, and mind the fact that it does not guarantee returns, unlike the traditional tax saving instruments. As per Section 80C of the Indian Income Tax Act, 1961 a tax paying individual can invest up to Rs 1.5 lacs every fiscal year in a tax saving scheme like the ELSS fund and claim tax benefit for the sum invested.
The fact that ELSS funds have outperformed other tax saving schemes proves that they have a better return on investment ratio as compared to others like bank FDs or Public Provident Fund. Not only does ELSS come with a short lock in period, but it helps you save tax and in the long run even helps you in wealth creation.
With so many features and benefits, ELSS is definitely a hot favorite for all types of investments as well as taxpayers. But still, there are a few myths that have emerged over the years making investors skeptical about whether they should invest in this fund. Here are some myths surrounding ELSS that are not true at all and something that potential investors should have clarity about.
ELSS is ideal for short term investing
Just because an ELSS fund comes with a short lock in period of three years investors need not redeem their gains soon after the lock in period is over. Remember that you are going to have to deal with taxes till the time to earn and hence every year for tax declaration, you can show your investments in an ELSS fund. Also, ELSS is an equity mutual fund scheme. We all know for a fact that any investments made in the equity markets are for the short term can turn volatile. On the other hand, long term investing may not only reduce investment risk but allow investors to generate better returns. Hence, one can continue investing in ELSS and save tax till the time they retire.
ELSS funds are limited to an investment of Rs. 1.5 Lacs
Understand that the limit for claiming tax deductions under Section 80C for the ELSS fund is Rs. 1.5 Lacs. This does not mean that you should only invest Rs. 1.5 Lacs every financial year in this tax saver fund. Investors can even more in ELSS. They can do so either by making a lumpsum investment or via the Systematic Investment Plan option. There is no upper limit for ELSS investments and hence your monthly SIP can be Rs 500, Rs 5000, Rs 50000, Rs 5 Lacs, or any sum that remains aligned with your risk appetite, your investment objective, and your ultimate financial goal.
ELSS is a risky investment
ELSS may not guarantee returns by traditional tax saving instruments, but it has the potential to generate far better returns just the way it has done in the past. Even though ELSS predominantly invests in the equity market, its portfolio is spread across companies belonging to different market capitalizations. Also, ELSS funds are professionally managed by a team of fund managers who are destined to actively manage the scheme portfolio and generate risk adjusted returns. Thus, by investing in ELSS you not only save tax but you invest in a mutual fund scheme that offers active risk management and can even help you create wealth over the long term.