What are the advantages of investing in ELSS?


ELSS is an abbreviation of the Equity Linked Savings Scheme. It is an open-ended Equity Mutual Fund providing tax benefits on both dividend and capital gains earned. Under section 80 C of the income tax act 1961, you can lower your taxability by Rs. 1.5 Lakhs by investing in ELSS. It is one of the best investment options for tax savers.

However, unlike other tax-saving investments, the lock-in period of ELSS is 3 years. You can invest in ELSS through SIP and also lump sum. Most savvy investors invest in ELSS through SIP to gain the benefits of compounding and rupee-cost averaging.

ELSS Explained:

Equity Linked Savings Scheme is one such an avenue that come with capital growth and tax benefits. When we compare to other investment options, ELSS offers you the lowest lock-in period which is only 3 years. You can withdraw your tax saver funds at the end of the 3 years and when you reinvest the same, you can get the tax exemption twice which is 6 years.

Overall, it is a good investment vehicle to save tax and get potential returns of the investment. The minimum investment limit of ELSS of Rs. 5000, but ELSS funds have a lower threshold of Rs.500. New investors could start a SIP in ELSS and gradually grow their investment with time.

Features of ELSS:

The proxy route to direct stock investments

  1. Lock-in feature provides long-term investing discipline
  2. Provides Tax saving benefits and the potential for higher returns •

 Flexibility to invest small amounts through a SIP

Benefits of ELSS:

Tax benefits: It is one of the significant advantages of investing in ELSS. Under Section 80 C, investors who invest in ELSS is exempted from income tax. Let’s understand this benefit from this example. Mahesh is a senior programming engineer with an assessable pay of Rs. 12 lakh a year. This places him in the 30% tax section. He chooses to contribute Rs. 1.5 lakh in ELSS finance. Under 80C of the personal duty act, this brings down his taxable income to Rs. 10.5 lakh and converts into a saving of Rs. 46,800* (31.2%% of Rs. 1.5 lakh)*.

Low lock-in period: One of the major clauses you need to keep in mind while investing in ELSS is that the total sum that you are going to invest in ELSS will not withdraw before 3 years. While it may seem like a small obstacle. But, amongst all the tax savings instruments, this product has the shortest- lock-in period. Tax savings FD’s have 5 years lock-in period and PFF has a 15 years lock-in period. Hence, ELSS allows you greater flexibility amongst other tax savings options.

Higher returns: The returns of the investment you will get after investing in ELSS is higher than fixed-income investment products. The dividend earned on such schemes can be reinvested or redeemed mutual funds. However, any amount is re-invested in ELSS will be locked for 3 years as per the investment maturity policy. All in all, ELSS has the potential to offer significantly higher returns- since it invests in a portfolio of equity instruments.

Inculate savings habits: A small investment is also saving. Spending 500 monthly can turn your savings into investment. This nurtures the habit of continuous savings and investing. Since there’s a lock-in period of 3 years, so you have a deposit fixed or lump sum amount every month. If you start a SIP in ELSS, the return from your SIP amounts will be generated every 3 years of the first investment. Besides, the returns will be exempted from taxes.

Ease of investment: Investing in ELSS is a hassle-free process. You can invest in ELSS via SIP or as a lump sum. If you want to reinvest the money after the lock-in period you can do. But, if you choose to sell them, you can do it online. In just a few clicks. The funds are credited into your account within 3-4 working days. Along with that, there are no restrictions on the total amount invested in the ELSS.

Dividends VS Growths: There are two investment options when it comes to the ELSS that are dividend and growth. In the case dividend, a period annual dividend payment is made to the investor on the total gains. In case of growth, the lump sum amount will be credited to your account after the completion of 3 years.

Final Say:

Investment in ELSS could provide your capital growth over the long term since they invest in equity. The two major advantages of investing in ELSS are- it has the lowest lock-in period and high returns of investment as compared to other avenues.

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