What is ELSS?
An Equity Linked Savings Scheme (ELSS), popularly known as a tax-saving mutual fund, is a type of equity fund which qualifies for a tax deduction of up to Rs. 1.5 lakh annually under Section 80C of the Income Tax Act.
Benefits of Investing in ELSS
An ELSS comes with the shortest lock-in period of 3 years among all the tax saving investment options.
Being a market-linked instrument, an ELSS can give higher returns than conventional tax-saving instruments like fixed deposits, PPF, National Scheme Certificate (NSC), etc.
In addition to qualifying for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, the long-term capital gains earned on an ELSS are tax-free up to Rs. 1 lakh per annum.
An ELSS is the only tax-saving instrument which comes with a SIP (Systematic Investment Option). A SIP enables an investor to invest with an amount as low as Rs. 500 along with getting the benefit of power of compounding.
ELSS v/s Other Tax-Saving Investment Instruments
|Tax-Saving Investment Options||Lock-in Period||Return||Risk Profile|
|Fixed Deposit||5 years||6.50%-8.25%||Low|
|Public Provident Fund||15 years||8%||Low|
|National Savings Certificate||5 years||8%||Low|
|National Pension System||Till retirement (60 years of age)||10.81%*||Moderate|
*5-year weighted average return (with 50% in equity and 25% each in corporate bonds and government bonds) of NPS Tier-1 schemes. Returns not guaranteed.
Also Read: Best ELSS Funds: Top 10 Tax Saving Mutual Funds.