Invest in ELSS for tax savings

How can you save tax?

Section 80C of Income Tax Act allows taxpayers to claim up to Rs 150,000 deduction from their taxable income by investing in some eligible schemes. Taxpayers can save up to Rs 46,800 in taxes every year by investing in 80C schemes. Eligible schemes under Section 80C are EPF (Employee Provident Fund, VPF (Voluntary Provident Fund), PPF (Public Provident Fund), NSC (National Savings Certificates), 5 year Tax Saver Bank FDs, life insurance plans and mutual fund ELSS or Equity Linked Savings Scheme of mutual funds.

What is ELSS?

ELSS fund is a type of equity mutual fund schemes which qualify for tax savings under Section 80C of Income Tax Act 1961. ELSS, also known as tax saving mutual funds are essentially diversified equity mutual funds which invest across market cap segments and industry sectors. ELSS funds have a lock-in period of 3 years. You cannot redeem units of your ELSS prior to 3 years from the date of the investment. If you are investing in ELSS through SIP, each SIP instalment will be locked in for 3 years. You can redeem units of your ELSS partially or fully at any time after 3 years from the date of investment. There is no upper limit in ELSS investments but the maximum deduction that can be claimed is Rs 150,000.

Why invest in ELSS?

• Tax payers can save up to Rs 46,800 in taxes per year by investing in ELSS mutual fund schemes.
• Historical data shows that equity, as an asset class, has the potential of giving superior returns in the long term. In the last 10 years (ending 31^st March 2022), Nifty 50 TRI gave 14% CAGR return. In contrast, average PPF interest rate over the last 10 years was only 8.1%.
• Since ELSS funds can invest across various sectors and stocks like, large, mid and small caps, they truly offer diversification benefits to investors. It also provides opportunity for fund managers to create alphas for investors.
• The 3 year lock-in period of ELSS mutual fund enables fund managers to stick to their high conviction stocks for a long time period because of relatively less redemption pressure. These stocks can generate alphas for investors.
• ELSS is the most liquid investment option u/s 80C. ELSS has lock-in period of 3 years, whereas minimum lock-in period of other 80C investment options is 5 years
• ELSS is one of the most tax friendly investments among all 80C investment options. Long term capital gains of up to Rs 100,000 is tax exempt and taxed only at 10% (plus applicable surcharge and cess) thereafter.

Who should invest in ELSS?

• Investors looking for tax savings and wealth creation
• Investors with moderately high to high risk appetites
• Investors with long investment tenures
• Investors should consult with their financial advisors, if ELSS mutual fund investment is suitable for their tax planning needs.