Do You Know ELSS Can Help You in Tax Planning And Accomplishing Financial Goals?

Time to read: 5 mins | January 19, 2019

We are officially in the tax saving season –– that time of the year when everyone rushes to make some tax saving investments, typically those that qualify for a deduction up to a sum of Rs.1.50 lakh under Section 80C of the Income-Tax Act, 1961.

You have a galore of tax-saving investment avenues viz. Public Provident Fund (PPF), National Saving Certificate (NSC), Pension Funds, National Pension System (NPS), 5-Year tax saver deposits, Equity Linked Saving Schemes (ELSSs) and so on, each of these with its unique features.

Hence, instead of investing in an ad hoc manner, it would be far more meaningful if you select tax-saving investments after understanding all the features and in accordance with your risk appetite.

Equity Linked Savings Scheme or ELSS (also known as a Tax Saving Fund) is a market-linked investment instrument.

ELSS invest in listed equities and are therefore categorised as equity mutual funds. Most ELSSs hold a diversified portfolio of stocks, across market capitalisation segments (large-cap, mid-cap, and small-cap) and sectors. The investment style could be growth or value or even a combination of both these styles, depending on the investment mandate of the scheme.

The minimum application amount for most ELSS is as little as Rs.500, with no upper limit. However, do remember, only a sum up to Rs 1.50 lakh is eligible for deduction under Section 80C.

A distinguishing feature about ELSS is the compulsory lock-in period of three years. This is the lowest lock-in period amongst all the other tax-saving investment avenues. Lock-in means you cannot redeem your investments before three years from the date of your investment.

Therefore, when you pick ELSS for tax-saving, make sure you buy the best ones having a consistent performance track record and from a fund house following robust investment processes. You can invest the entire amount at one go (as a lump sum investment) or via a Systematic Investment Plan (SIP - a mode of investing in mutual funds in a piecemeal manner). In case you opt for the latter, do note that each SIP instalment will be subject to a three-year lock-in period. Nevertheless, SIP is a worthy route to invest in mutual funds regularly and systematically and inculcates a sense of discipline. Further, SIP helps to reduce the shocks of a volatile equity market vide rupee-cost averaging and at the same time helps you compound wealth over a long period of time.

Begin 2019 on the right note and aim to maximise tax-saving as well as wealth creation. In the long-term, ELSS or tax-saving funds have displayed their potential to clock luring inflation-adjusted returns. The returns generated by some worthy ELSSs reflect that not only are they worthy for tax planning, but they can even help meet your financial goals.

Finally, when you invest in ELSSs, make sure you have an investment time horizon of at least 3-5 years. Pick the best mutual funds here.

Happy Investing!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.