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With the tax season around the corner, one of the most important questions is how do I save up on taxes? If you are a salaried individual, there are multiple options you can consider. One of which is ELSS funds.
Equity Linked Savings Scheme (ELSS) provides tax benefits and is considered one of the most lucrative tax-saving options. You have the option of investing a specific amount of money over a period of three years and getting great market-linked returns.
You also have tax exemptions under section 80C of the Income Tax Act. But before you get into investing, it's imperative to analyse both pros and cons. Let’s do that through this blog.
Understanding ELSS funds
Equity Linked Saving Schemes, or ELSS, is a type of mutual fund that serves the dual purpose of creating wealth and getting tax benefits.
You can put in up to ₹ 1.5 lakhs and save taxes up to ₹ 46,800 within the 80 C section of the 1961 Income Tax Act.
Besides the tax-saving benefit, equity investing acts as the cherry on the cake. ELSS saving schemes invest in shares of various companies. Due to this, the investor becomes a partial and proportionate owner of the company and its profits and losses. Equity has great potential to generate high returns on investment.
But, there are multiple additional factors that an investor must be aware of in the form of the Pros and Cons of ELSS funds. This is imperative before locking in their funds for three years.
Advantages of ELSS funds
ELSS funds are one of the most preferred investment options; given below are some of its major advantages:
Tax Savings
ELSS funds are the only kind of mutual funds that provide tax benefits. Investing in this scheme means you can claim deductions of about ₹ 1.5 lakhs a year. Under section 80C of the Income Tax Act, you can claim your deduction on these funds.
When the new tax regime was introduced, long-term capital gains from ELSS above ₹ 1 lakh were taxable. Irrespective of this, they still serve as one of the best investment options. The returns are also much higher than a Public Provident Fund (PPF) with a lock-in period of 15 years.
Short lock-in period
ELSS funds have one of the shortest lock-in periods. The amount is blocked for a period of 3 years. This is excellent if you compare the lock-in period of a Public Provident Fund, National Savings Certificate or Employees Provident Fund.
Potential for long-term return
With ELSS funds, you have the option to keep your funds invested for a longer period of time for even better returns. Since these funds are invested in equities, a considerable amount of wealth can be generated over a period of time.
Promotes a habit of savings
ELSS investments can start as low as ₹ 500 a month. This can be achieved through a Systematic Investment Plan (SIP). Hence, with monthly minimum investments, you can watch your wealth grow.
Possibility of higher returns
Since these funds are market-linked, you have a probability of higher returns from the market. ELSS funds can get you twice the returns that a regular savings scheme might provide. According to statistics, ELSS can generate around 12% returns on average over a period of 10 years. This return is considerable since PPF provides approximately 8%.
Disadvantages of ELSS funds
While ELSS funds offer multiple benefits, you must also keep in mind some other factors associated with them, like the ones given below:
Higher risk
THE RISK IS ALSO HIGHER since ELSS funds are directly linked to the equity market. Equity-related investments are more prone to market volatility. Hence, ELSS mutual funds carry high risk.
ELSS Liquidity
ELSS mutual funds offer limited liquidity. Since the lock-in period is 3 years, investors must know that these funds are unavailable in the stipulated period.
Not an option for risk-averse investors
If risk is a factor for consideration, ELSS funds may not be your best bet. A risk-averse investor would rather opt for a lower return but a safer option, like in the case of life insurance or PPF.
Limited benefits
While tax benefits exist, they are limited in nature. You can only get a tax benefit of ₹ 1.5 lakhs in a financial year, even if the amount invested is higher than that.
Management cost
Typically, ELSS funds are managed by a fund manager; this can prove costly. You are liable to pay a certain fee for their expert assistance.
Conclusion
ELSS prominently invests in equities. Compared to other investment options, ELSS funds are considered relatively high risk-taking. However, compared to small or mid-cap funds, ELSS funds are safer regarding volatility. In either case, as an investor, you must consider the pros and cons and evaluate risks before investing in these funds.
