Go For ELSS To Build Wealth & Save Tax

By | March 2, 2017

Go For ELSS To Build Wealth & Save Tax

The last three months of the financial year are often spent looking for ways to save tax. There are several tax-saving options in the market such as PPF, NSC, tax-saving deposits, etc. to avail exemptions under Section 80C of the Income Tax Act. But how about building wealth while saving tax?

The Equity Linked Saving Scheme (ELSS) Mutual Fund has an edge over other investment instruments as it has the potential to provide high long-term returns apart from allowing a deduction of up to Rs. 1.5 lakh under Section 80C.

Additional Reading: Try direct ELSS funds for better returns

Let’s take a look at the advantages and disadvantages of ELSS funds and how to invest in them.

ELSS funds can generate better returns than debt instruments since most of their corpus is invested in equity. This means there’s a high degree of risk in the investment, but in the long run, market fluctuations can average out to provide handsome returns.

ELSS comes with both dividend and growth options and the investor is entitled to get dividends even during the lock-in period. According to the CRISIL – AMFI ELSS Fund Performance Index in December 2016, ELSS funds have returned 3.35% last year, 16.64% in the last three years, and 17.71% and 10.61% in the last five and 10 years, respectively.

Although the minimum amount to be invested in ELSS is Rs. 500, there is no limit on the maximum you can invest. There is a three-year lock-in period associated with this fund and withdrawal can be done only on completion of the stipulated time. The long-term capital gains from the fund are not taxable as well.

Benefits of ELSS funds

  • A tax deduction of up to Rs 1.5 lakh can be claimed under Section 80C on any investment towards ELSS funds.
  • The lock-in period is lower than that of Public Provident Fund (PPF), National Savings Scheme (NSC) and bank deposits.
  • Returns can be higher than other investment instruments, depending on the market movement. The best-performing ELSS funds have provided CAGR of around 20% in the last five years. Therefore, ELSS funds can provide high capital appreciation in the long-term.
  • There’s no long-term capital tax on ELSS funds, making your returns tax-free.
  • There is no fixed maturity period associated with the fund. You can stay invested for as long as you want.
  • Investors are entitled to dividends even during the lock-in period and enjoy tax exemption.

Disadvantages of ELSS funds

  • These funds are riskier than investment instruments such as PPFs and bank deposits.
  • Premature withdrawal is not allowed, so this is not a liquid investment for three years.

Although investment in ELSS can be done through both lump-sum investments and SIPs, the SIP route averages market volatility. Through SIPs, you invest an amount as small as Rs. 500 each month.

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