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ELSS – Equity Linked Saving Scheme

Equity Linked Savings Scheme is a tax saving mutual fund approved under the Income Tax Act. Under the scheme, through investment, an individual can save upto INR 1,50,000 in a financial year, under Section 80C of the Act. An equity-linked saving scheme, in short, is popularly known as ELSS. ELSS has caught up with other modes of investment over the past few years. However, their growing popularity has led to the availability of many misinformations. Through this article, we intend to educate the investors about the advantages and disadvantages of investing in ELSS funds.

Basic Features of ELSS

The basic features of ELSS scheme are as follows:

  1.  It is an equity-oriented investment
  2. ELSS offers both growth and dividend options
  3. Lock-in period under ELSS is of 3 years from the date of units allotment
  4. After the lock-in period is over, the units are free to be redeemed or switched
  5. Long term capital gain tax above INR 1,00,000 would be taxed at the rate of 10%
  6. Investment under ELSS is more suitable for people who are looking at long term investment with tax savings
  7. ELSS investment is bit risky as the returns are based on the equities which are volatile in nature

Advantages of ELSS

ELSS funds are most tax-efficient investment. The amount invested in an ELSS funds can be claimed as deduction under section 80C of the Income Tax Act. Compared to traditional tax-saving options like Public Provident Fund (PPF), National Savings Certificate (NSC) and bank fixed deposits the lock-in period of an ELSS fund is much lesser. ELSS funds have a lock-in period of only 3 years, whereas, PPF investments have a lock-in period of 15 years, NSC investments have a lock-in period of 6 years and bank fixed deposits, eligible for tax deduction under section 80C of the Income Tax Act, have a lock-in period of 5 years.

Thus as compared to all the other tax-saving investment options, ELSS has the least lock-in period. One can also opt for SIP investments. ELSS funds offer the best combination of a long term horizon and option to invest through SIP. ELSS funds will deliver good returns in the long run, since the same is an equity investment. In the long run, the investors will benefit from the power of compounding, which will give visibly higher yields in the later years.

Disadvantages of ELSS

If the investor has invested INR 5,00,000 in any financial year under ELSS, the investor can claim maximum deduction of only INR 1,50,000 under section 80C of the Income Tax Act. Further, INR 1,50,000 deduction under section 80C consist of many other allowable investment and if the investor has already invested more than INR 1,50,000 in other allowable investment than no tax benefit will be available to them for investing in ELSS. This can be said as one of the disadvantage of ELSS funds. Further, ELSS is not for risk-averse investors. ELSS investments are associated with stock market and hence all the risk associated with equity investment will affect ELSS funds. Hence ELSS investment is not for the person who is not willing to take risk. Another disadvantage of ELSS is that you cannot withdraw your funds before the maturity date. Other tax saving options like PPF and bank deposits permit premature withdrawal, subject to certain conditions.

Are Equity Linked Savings Schemes the Right Option For You?

Equity Linked Savings Scheme is a good option for investors who are willing to take certain risks and targeting higher returns through equity exposure. Further under ELSS investor can also invest through Systematic Investment Plan (SIP).

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