What is ELSS and What are its Tax Benefits?

Prices are rising day by day, so it is very much necessary to plan out how to use the money carefully to manage daily expenditures and some for the future. After all, no matter how much you earn, planning a good investment is always important to achieve your money goals. The best investment that helps you save on taxes and increase your wealth is ELSS, which stands for Equity Linked Savings Scheme.

Not only do you get good growth potential but also are able to save tax up to Rs. 1.5 lakhs in accordance with section 80C of the Indian Income Tax Act, 1969 as applicable through ELSS. People generally invest in the ELSS scheme besides other schemes qualifying for the deduction under 80C. One important thing to know about this tax-saving mutual fund scheme is that it has a 3-year lock-in period. Even though there is no limit on how much you can invest in a year, you can only get a tax deduction of up to 1.5 lakhs.

While ELSS tax benefit is probably its most significant advantage, the funds also offer a host of other valuable benefits such as:

• Higher Return Potential

ELSS is basically a segment of mutual funds that invest most of their corpus in equities. Stock markets usually provide better returns than nearly every other investment avenue over the long term. Therefore, investing through ELSS is a wonderful idea if you require generating wealth over time and simultaneously saving on tax.

• Growth and Dividend Options

When you invest your money in an ELSS, you have a choice -growth or dividend. In growth, the dividend received is re-invested into the fund, which, over time, build wealth in the long run. In the case of a dividend, an investor receives the declared dividend by the fund. After the declaration of dividend, the NAV or net asset value of the fund goes down, accounting for the amount of dividend distributed.

• Shorter Lock-in Period

ELSS mutual funds have the shortest lock-in period of just three years, compared to other 80C investments like PPF and NSC. Even tax-saving FDs usually require you to invest for at least 5 years. To get the tax deduction, you need to stay invested until the lock-in period ends. This makes ELSS a more flexible choice for investing.

• Investment Flexibility

One of the major advantages of ELSS is that you can invest a big amount at one go or start a SIP. Under SIP, you can initiate investing in the fund you like with as little as Rs. 1,000 every month. But keep in mind, every individual SIP investment will be locked in for 3 years.

[Also Read: 7 Things to know before Investing in Mutual Funds for beginners]

ELSS funds are currently one of the best ways to save tax. Start looking for the best tax saving mutual funds to reduce your income tax burden and generate handsome returns in the process.

However, as ELSS funds are equity-oriented, do consider your risk appetite and investment objective before investing.