ELSS is an aggressive mutual fund that invests primarily in equities. ELSS also comes under section 80C of the income tax act 1960. But ELSS has many advantages when compared to other 80C options. This includes a much shorter lock-in/maturity period and higher return potential. Furthermore, it comes with professional fund management, which could enable greater capital appreciation. But the advantages of ELSS don’t end here. Read on to find out all about ELSS and how it is better in many aspects compared to other tax-saving investment options.
What is ELSS?
ELSS is a mutual fund that primarily invests in equities. They offer professional management by experienced finance professionals called fund managers. They are offered by asset management companies and are known as fund houses. The biggest advantage of ELSS is that it is the only mutual fund that has tax benefits. This is because ELSS comes under section 80C of the income tax act of 1961. Under the scheme, you can save up to Rs.1.5 lakh for your contribution to the fund. This is roughly up to RS.46,800 per year.
This doesn’t mean your investment is capped. You can invest any amount you want in ELSS, but any amount over and above Rs1.5 lakh won’t be edible for tax benefits.
ELSS has a lock-in period of three years. This is the shortest among all the 80C investment options. But the lock-in period ensures that you will only be taxed with long-term capital gains. Here, profit up to Rs.1 lakh is tax exempted, and the rest is taxed at a flat 10%.
Why is ELSS better than other 80C options?
Shorter term: ELSS is the 80C investment option with the shortest term. This is compared to other options, which have lock-in periods between five and 15 years. This makes ELSS much more flexible, but at the same time, there is no way to withdraw your investment before you reach the maturity period once invested.
Higher returns: As said above, ELSS is an investment option that invests primarily in equities. Up to 65% of an ELSS fund’s portfolio could be equities. This gives ELSS the biggest return potential among all other investment options. Coupled with the tax benefits, ELSS becomes an investment option that saves you tax and gives you higher returns. . For instance, ELSS funds give you a return of 12% on average when compared to 8% on PPF, which gives 8%. Furthermore, the lock-in period ensues, and you pay only long-term capital gains. This is tax exempt up to Rs.1 lakh of profit and a flat 10% above that limit.
Balanced portfolio: ELSS, as the name, focus on equity investment. But even given that, it could be a balanced option, especially if you are trying to invest in equities.
This is because the maximum limit of equity presence in an ELSS portfolio is 65%. The rest of the portfolio is filled with different securities like debt, bonds, commodities, etc. This makes your portfolio much more balanced than investing in equities alone.
Things to keep in mind before you invest in ELSS
- Since ELSS is equity-focused, ensure your risk appetite allows you to invest in ELSS>
- If you have other 80C investments and plan to claim tax benefits for those investments, too, you may not be able to get Rs.1.5 lakh tax benefits for ELSS alone.
- The lock-in period with ELSS is strict, and there is no way to withdraw before the lock-in period ends.
Below are some reasons that make ELSS a better 80C investment option. But ensure you do your research to ensure the investment method works for your goals.