What is ELSS and Its Tax Benefits?

An equity-linked savings scheme or ELSS is the only type of mutual fund that is eligible for tax benefits. Under Section 80C of the Income Tax Act, 1961, any investor can claim a tax rebate of up to 1,50,000 rupees annually and save up to 46,800 rupees. Additionally, the income generated under this scheme at the end of the three-year tenure is considered Long Term Capital Gain (LTCG) and usually taxed at 10%, if the income is more than 1 lakh rupees This tax-saving mutual fund investment primarily invests in equity-linked instruments and offers several benefits.

Tax Benefits Of ELSS

Investors prefer to create a diversified portfolio when investing in mutual funds. ELSS tax benefits and their potential to offer higher returns (as an equity-linked instrument) make them an ideal choice of investment for the long term. That is why they play an important role in the investment portfolio of almost every investor. Here are some of the prominent benefits of this scheme.

Higher Returns on Investment

As ELSS invests predominantly in equity instruments, it can generate potentially higher returns than other investment options. ELSS allows dual benefits to investors. Firstly, they save on taxes while generating high profits. Secondly, they become the ideal choice of investors that are willing to invest for a medium to long duration.

Shorter Lock-in Period

Most of the tax-saving instruments like PPF, NSC, and EPF require a minimum of five years lock-in period. But, ELSS has a shorter lock-in period of three years.

More Flexibility

Some people may have invested in ULIPs at lower cost through insurance firms directly as they generate positive returns similar to that of an ELSS over time. But, ELSS has an added benefit in terms of flexibility. If an investor is not satisfied with the performance of the ELSS fund, he/she can shift to another fund as they are not required to commit to a multi-year deal.

Can Be Combined With PPF

Another ELSS tax benefit is that it can be combined with PPF, unlike several other schemes. Investors can achieve both – stability offered by PPF and the higher earning potential of ELSS. It allows them to create a diversified portfolio with a mix of debt and equity and also have the safety of government-backed securities.

Protects Against Market Volatility

These mutual funds are usually the preferred choice of new investors when it comes to choosing equity-linked investments. Most equity investors that are new to the market start investing under this scheme to build a financial discipline as they can’t touch the fund for the lock-in period of three years. It helps them protects the invested money against the volatility of market trends. As they feel more comfortable and grow their risk-appetite, they start investing in other equity mutual fund schemes.

Every investor understands that a diversified portfolio plays an important role in wealth creation. ELSS has found a place in almost every portfolio mainly because of its potential to generate higher returns with a short lock-in period. And the best part is that it also offers tax-savings to investors.