Investing is a key aspect of financial planning as it helps you grow your wealth and achieve your financial goals. The primary objective of investing is to earn profits, and with the right investment options, you can build a corpus or earn a steady stream of income. However, what many people don’t know is that investments can offer other benefits besides financial returns. One of these benefits is tax savings. An Equity-Linked Savings Scheme (ELSS) is a type of investment that provides tax benefits along with the opportunity for capital appreciation. This article will delve deeper into ELSS and understand how it works to help you make informed investment decisions.
What is ELSS?
Equity-Linked Savings Scheme (ELSS) is a type of mutual fund that invests primarily in equities. It functions similarly to other mutual funds, where the investment of multiple investors is pooled together and managed by a professional fund manager to create a diversified portfolio. In the case of ELSS, the portfolio is equity-focused and designed to provide potential capital appreciation to investors.
What sets ELSS apart from other equity funds is its tax-saving aspect. ELSS comes under section 80C of the Income Tax Act, 1961, which means that investors can claim tax benefits of up to Rs 1.5 lakh for their investment in ELSS. This makes ELSS an attractive investment option for those who are looking to save on their taxes while also investing in the stock market.
Benefits of investing in ELSS
- ELSS is one of the few investment alternatives that allow you to reduce taxes while simultaneously earning possible gains from the stock market. You can minimise your taxable income and hence your overall tax obligation by investing in ELSS. This can result in large tax savings, making ELSS an attractive investment option for many people.
- Another advantage of ELSS is its lock-in period, which is the minimum period for which an investment must be held before it can be redeemed. ELSS has a lock-in period of three years, which is the lowest among tax-saving investment options. This feature makes it a more flexible investment choice compared to other tax-saving schemes that have longer lock-in periods. The shorter lock-in period allows investors to access their funds sooner and provides more flexibility to make changes to their investment portfolio if needed.
- ELSS also has the potential to provide higher returns compared to other section 80C investment options. This is because ELSS invests primarily in equity funds, which have the potential for higher returns over the long term. Historically, equities have delivered higher returns compared to other asset classes, making ELSS a suitable investment option for those who are looking to generate higher returns from their investments.
Drawbacks of ELSS
- ELSS has a lock-in period of three years. Even though it is shorter compared to other tax-saving instruments, the lock-in period still makes it challenging for investors as there is no way to divest before the lock-in period ends.
- Since ELSS invests in equities, there is a higher risk.
ELSS is a popular investment option that offers several benefits, including tax savings, a shorter lock-in period, and the potential for higher returns. These benefits make ELSS an attractive investment choice for those who are looking to save on taxes while also investing in the stock market.
However, it is important to understand that ELSS also has its limitations, such as the three-year lock-in period and the higher risk associated with investing in equities. Before investing in ELSS, it is crucial to consider your investment goals, risk tolerance, and overall financial situation to determine if it is the right investment option for you.