Can Investing ELSS Be The Best Option For Saving Tax?

Can Investing ELSS Be The Best Option For Saving Tax?

There are undoubtedly several tax saving options one can think of. Though this might come as a relief to some, for others it is yet another reason to get confused. With the availability of a huge variety of instruments, it can become quite difficult for an investor to decide which investment or scheme could prove to be one of the best for him concerning saving tax.

And that is exactly why we are here!

Out of all the instruments available, ELSS tax saving mutual funds undoubtedly steal the show.

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Investing in one of the best ELSS funds can prove to be quite an efficient way of saving tax as compared to any other instrument one can find under Section 80C of the Income Tax Act, 1961. This instrument can help you with accumulating a good amount of wealth. Plus, the advantages such as professional fund management and a comparatively short lock-in period make it a better option as compared to any other instrument.

In this article, we will try to cover why ELSS is the best option for your tax-saving needs.

What is an Equity Linked Savings Scheme (ELSS)?

Equity Linked Savings Scheme (ELSS) are mutual funds managed by experienced fund managers with a view of saving taxes for individuals. ELSS invests directly in equities or savings schemes that are connected to equities.

An individual can claim tax deductions of up to 1,50,000 via investing in the ELSS Schemes, as stated under Section 80C of the Income Tax Act, 1961. But any extra investment over 1.5 lakh won’t qualify for any kind of tax benefits according to the provisions mentioned in the section. The return that an investor gets by investing in ELSS is taxable under Long Term Capital Gains (LTCG) and Dividend Distribution Tax (DDT). Now, this whole scenario with the LTCG was introduced by the government in the year 2018-19 in the Union Budget. But this introduction never seemed to affect the popularity of ELSS and it still emerges as the most preferred option among all other options that Section 80C has to provide the investors.

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What Are the Types of ELSS Schemes?

ELSS Funds can be classified under two broad categories:

  1. Growth Oriented: Under this scheme, you can realize the full value of the fund only at the time of redemption. This is a good scheme to invest in if you are looking for compounding wealth growth opportunities.

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  1. Dividend Payout Schemes: This particular scheme can be further divided into two sub-categories- Dividend Payout Option and Dividend Reinvestment Option. In the former option, an investor can receive dividends that are tax-free while in the latter an investor can reinvest the dividend received as a new investment.

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What are the Advantages of Choosing ELSS over other Investments under Section 80C?

Most Mutual Fund Advisors and Tax Planning Services Agencies will agree that ELSS is the most effective tax savings investment in India. There are a variety of reasons to support the same. Some of the pointers are mentioned below: 

  1. A Short Lock-In Period: Lock-In Period of 3 years in ELSS is the shortest amongst all the other tax-saving instruments. All the other options like the PPF, NSC, and EPF, require a minimum of five years of lock-in. Therefore, if you want your invested money back within the least time, do look for ELSS.

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  1. Higher Returns: Since ELSS revolves mostly around investing in instruments dealing in equities, the potential returns are higher which can not only help offset the rising inflation but is also an excellent tool for wealth building.

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ELSS is a great option for investors who are willing to invest for a medium to a long period of time. Over the years it has been noticed that ELSS, over the course of 10 or more years can generate around 12% of returns on the investment made. This return is certainly much more than just 8% in the case of PPF.

As an investor who wishes to have some idea about the estimated value of their investment in ELSS in advance can reach out to a financial planner or can use an ELSS calculator for the same.

  1. Protection: Often ELSS mutual funds are the primary mark of commitment for financial investors with regards to investing resources into investments that are linked to equity. Numerous financial investors looking to invest in equity start with investing in equities through these instruments and then continue to invest their resources in equity mutual fund schemes. It assists with building discipline, considering that you can’t touch the fund for the lock-in time of three years. These funds additionally go about as a solid safeguard to handle the unpredictability that might accompany investing resources into financial exchanges. The plan benefits from the market highs as well as has arrangements to reduce the effect of the lows.
  1. Benefit from a Combination of ELSS and PPF: Another incredible benefit that ELSS has over its rivals is that it tends to be combined with PPF for better returns. This blend is a strong ground to uncover the dependability presented by PPF and the procuring capability of ELSS. Assuming you see intently, you will discover that there are further benefits to this; your portfolio is very much expanded with a blend of equity and debt, plus you have the safety of government-upheld protections with a potential chance to earn more through equity.
  1. Flexibility: It is quite possible that ULIPS that were sold to you at a lower price through insurance companies directly, are capable of providing you with similar returns that you might get from investing in ELSS over a longer period of time. But even in this scenario, ELSS emerges out to be a better option as your ULIPS won’t provide you with the kind of flexibility that ELSS can.

In the case of ELSS, if you are not satisfied with the returns, you have the option of shifting to another fund as there is no commitment regarding a multi-year deal. But in the case of ULIPS, if you are unsatisfied, though you can invest in another fund, that fund should be offered by that particular ULIP only.

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Which is a better option: Investing in ELSS or Mutual Funds?

This is a frequently asked question by a lot of investors especially the ones who are just starting their journey in investment. Well…here is a simple explanation.

An ELSS is a mutual funds class that makes you eligible for tax deductions under Section 80C of the Income Tax Act, 1961. In case you are looking to claim a tax rebate under the aforementioned section, investing in ELSS is your best option. On doing so, you can decrease your available pay by up to ₹1,50,000 every year, which assists you with saving upto to ₹ 46,800 per year in taxes. Once your limit regarding Section 80C gets exhausted, you can plan on investing in other mutual fund schemes, depending on your financial goals and the amount of risk you are willing to take.

The Conclusion

All these pointers must have convinced you now that ELSS is the best tax saving mutual funds which is far better than any other tax-saving instrument under Section 80C. The trend can be seen in the recent mutual fund inflows as well.

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The inflows have shown a continuous growth of almost 10% on a YoY (Year on Year) basis. Even in 2020, when the COVID-19 pandemic struck, flows have been in the positive territory only.

If you wish to discuss more about your investment portfolio and whether investing in ELSS can prove to be beneficial for you, contact Nico Wealth today for a free consultation. We can assist you with the best ELSS funds to invest in 2022 so that you can achieve your financial goal easily.

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