It’s that time of year when people are scurrying to get their tax-saving investments in order. We are often asked how one can lower their taxable income, and in turn reduce the amount of tax that one is liable to pay.
You might have heard of Section 80C of the Income Tax Act, 1961. While it is the most common section offering a whole host of tax benefits, the number of avenues available within this section can baffle anyone. Moreover, it is tough to make sound decisions on a deadline. Leaving your tax-saving decisions for the end of the year can result in bad investment choices.
If we had to pick just one avenue for tax-saving that outperforms all others, it would have to be the Equity-Linked Saving Scheme, aka ELSS. And today we want to talk to you about why ELSS is the best of the lot.
First things first, what is ELSS?
Commonly called a tax-saver fund, the Equity-Linked Savings Scheme is a type of mutual fund scheme that is created specifically to save tax. This scheme invests in shares of various companies listed on the stock exchange.
Here’s a sample of the top holdings of an ELSS fund:
The maximum limit under Section 80C is Rs.1,50,000. Let’s say you utilize this fully by investing entirely in ELSS. You can save up to Rs.46,800 in tax, especially if your annual income falls in the 30% tax bracket. This translates to a saving of nearly Rs.4,000 per month in TDS (tax deducted at source). And what this ultimately means is that you will get an additional Rs.4,000 as salary credited to your account every month!
Most mutual fund houses have a dedicated ELSS fund that you can invest in. However, bear in mind that these schemes invest in the equity market, which makes them volatile in the near term. So, it’s wise to invest a small portion every month via an SIP (Systematic Investment Plan), rather than investing a large amount in one go.
Let’s now come to what makes ELSS stand out from other 80C investment options.
4 Reasons ELSS is the Best Tax-Saving Avenue
1) Shortest lock-in period
ELSS investments have a lock-in period of 3 years.
For instance, a lumpsum investment made today, on 12th February, 2022, can be redeemed after 11th February, 2025. Similarly, when it comes to SIP investments in an ELSS fund, each transaction is considered a fresh investment. So, the 3-year lock-in applies on each SIP date.
This period is much less as compared to other tax-saving investments that have lock-ins ranging from 5 years, right up to the retirement age of 60!
(Refer table below)
2) Exposure to equity = highest returns
As the name suggests, ELSS funds are 100% equity. And there are very few tax-saving investments that promote equity investing. If your money can grow at a rate that’s around 10% higher than the inflation rate, wouldn’t it be silly not to invest in ELSS? If you are a salaried employee, you probably already have some amount going towards Provident Fund (EPF), which takes care of the fixed income component of your investment portfolio. So ELSS makes for the perfect way to invest in equity and save on tax.
Of course, there are other equity-oriented tax-saving options like the Unit-linked Insurance Plan (ULIP), and the National Pension Scheme (NPS). However, ULIPs carry a high cost with extremely low transparency. And NPS is great for retirement, but not for shorter time-horizons.
What ELSS also ensures due to its lock-in period is that you do not redeem (withdraw) your funds when the market fluctuates. When you stay invested through the ups and downs, is when you’ll start noticing the magic of compounding.
3) Transparent, easy to track online
Websites such as Value Research Online and ET Money, offer detailed insights into the portfolio and performance of all categories of mutual funds. ELSS is no exception. It is easy to keep a regular check on the scheme you have invested in. This is possible even directly on the mutual fund website, as well as aggregator apps like Groww and Zerodha.
Further, in case of any changes or updates to the scheme, you will promptly be notified via email. Such facilities are lacking with the other 80C investment avenues.
4) Disciplined investing
The beauty of investing via the SIP route is that it disciplines you. And sound finances have more to do with habits and behaviours rather than stock tips and fancy jargon.
Once you start earning, filing your income tax return soon becomes mandatory. So, when you use ELSS as your primary mode of tax-saving, you familiarize yourself with the world of investing in a prudent and balanced way. This helps you on your journey to becoming a long-term investor and securing your financial future.
Still not convinced that ELSS is the best tax-saving avenue?
If these reasons haven’t convinced you to invest in ELSS yet, look at this table.
ELSS is the clear winner amongst all other tax-saving options.
Think like an investor
Warren Buffett once said, “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
Don’t choose avenues just to save on some tax and rejoice in the short term. Choose avenues that benefit you in the long term. Choose to invest and be sure you do it systematically.
With this financial year coming to an end soon, I hope that your tax-saving investments are in order. It isn’t too early to start planning for the next financial year as well. If you need any help whatsoever, don’t hesitate to reach out.
