Should one invest into Equity Linked Savings Scheme for tax benefits?
March 24, 2022
Namrata Singh, CFP & Chaitali Shah, MA (Economics)
The financial year is coming to an end in one week. If you are yet to finalise your tax saving investments, this article may help you.
An Equity Linked Savings Scheme (ELSS) is a type of a diversified mutual fund scheme eligible for tax deduction under section 80C of the Income Tax Act. It has a statutory lock-in period of 3 years.
A mutual fund is a pool of investors’ money that is managed by a fund manager. The investment is made in different markets and securities, in line with the investment objectives. In other words, through investment in a mutual fund, an investor can get access to equities, bonds, money market instruments and/or other securities. (We would be covering various aspects about mutual funds in our next few articles.)
What are Benefits of Investing into ELSS Schemes?
- Minimum investment amount is Rs.500. There is no capping on the maximum amount that can be invested. However, the tax benefit is limited to Rs. 1.5 lacs under section 80C of the Income Tax Act.
- It has the lowest lock in period of 3 years compared to other investments eligible for deductions under Section 80C.
- It can be used as a long term goal based wealth creation tool.
- Long Term Capital Gains up to INR 1 lac are tax exempt. Beyond 1 lac, the long term capital gains are taxed at 10%.
- One can invest into ELSS through the Systematic Investment Plan (SIP) Route.
What are the drawbacks of investing into ELSS schemes?
- There is no provision for premature withdrawal before 3 years.
- Investments are linked to the market and returns may be volatile in the short term (less than 3 years).
- The returns are not guaranteed.
Recent Performance of some of Equity Linked Savings Schemes
For someone with a low risk appetite products like Public Provident Fund, National Savings Certificate, 5 year Tax Savings Bank Fixed Deposits to name a few would be more suitable. However, someone with a higher risk appetite can consider ELSS as the returns are not guaranteed.
Most ELSS schemes have generated approximately 10%-14% annualised returns over 3 -5 year periods. Please note that one may see negative returns in case there are corrections in the equity market in the short term. Over longer horizons the returns are relatively higher than other products stated above.
ELSS funds are exposed to equities and are subject to market risks. You can mitigate this risk by investing in an Equity Linked Saving Scheme with a long-term approach. One must invest only in products that one understands or hire a professional financial advisor for support.
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Namrata Singh is a Certified Financial Planner with more than 14 years of experience in banking and wealth management. ([email protected])
Chaitali Shah, MCom & MA (Economics) was a Financial Economics – Faculty at Wilson College, Mumbai.([email protected])
(Please note all views are personal)
#ChaitaliShah #NamrataSingh
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