Equity Linked Saving Scheme (ELSS) is a mutual fund scheme considered to be a good option for those looking to invest in a market-linked plan while also getting the benefit of tax deduction.
ELSS has two main features that make it an attractive avenue to explore for investors. Firstly, investments in ELSS have a relatively short lock-in period (3 years) when compared to comparable tax-saving instruments. Secondly, these investments are eligible for a tax deduction up to ₹1.5 lakh in accordance with section 80C of the Income Tax Act, 1961.
One can begin by investing in these schemes with an amount as small as ₹500. The long-term capital gains (LTCG) on ELSS are exempted from tax up to ₹1 lakh, and the dividend received is tax-free in the hands of investors. Although ELSS comes with more inherent risk as compared to a fixed deposit or PPF, the returns on this scheme can potentially be higher due to the equity component.
Another flexibility that ELSS offers potential investors is that under the scheme, to lessen the risk and earn long-term capital returns, they can diversify their investments in more than one ELSS scheme basis factors like market capitalisation and exposure to the relevant industry. ELSS is characterised by liquidity in investments.
Some of the key benefits of investing in ELSS are:
- Helps in growing wealth over time;
- Higher post-tax returns on investing in many equity-linked instruments;
- Has the briefest lock-in period compared to other investment options listed under section 80C;
- Offers ease in investment as one can invest either in lumpsum or through a monthly systematic investment plan (SIP);
- Can be quickly started online - as a lumpsum or SIP;
- ELSS are market-linked, which can allow for potentially higher returns on investment;