If you are on the lookout for tax-saving mutual funds, ELSS funds are what you need. Equity-Linked Savings Scheme (ELSS) is an equity mutual fund and the only mutual fund that offers tax benefits. If you invest in ELSS tax-saver mutual fund, you can claim a deduction of up to Rs. 1.5 lakh under section 80C of the Income Tax Act, 1961. But that’s not the only reason why ELSS mutual funds are a good investment. Here are other features of ELSS funds that make it the best investment option to save taxes and build wealth:
- Lowest lock-in period
Every tax-saving instrument comes with a lock-in period during which you cannot sell your investment. ELSS funds come with a lock-in period of three years, which is the lowest among all tax-saving investments. The National Pension System (NPS) has a lock-in period till age 60 while Public Provident Fund (PPF) has a 15-year lock-in period.
This three-year lock-in period is beneficial from an investment perspective as well as the ideal minimum investment horizon for all equity mutual funds is five years anyway. This is to ensure that your equity funds get enough time to iron out any short-term market fluctuations. Another benefit is that your capital gains on ELSS funds would be considered long-term capital gains as they are held for longer than 12 months. Hence, you would be required to pay only 10% tax on your gains instead of 15% as is the case with short-term capital gains on equity funds. Moreover, your capital gains on ELSS funds are exempted up to Rs. 1 lakh.
- Higher, market-linked returns
Most tax-saving investments are for investors with a lower risk appetite and hence focus on capital protection instead of significant capital appreciation. Tax-saving fixed deposits have an interest rate of around 5% to 6% while PPF’s current interest rate is 7.10%. ELSS tax-saver mutual fund, on the other hand, invests primarily in the stock market and hence earns market-linked returns.
Market-linked returns mean that ELSS funds can earn returns of 15% to 18% and this is the highest among all tax-saving instruments. So, when you invest in ELSS funds, it does not just solely serve as a tax-saving mutual fund but as an instrument that helps you build wealth.
- SIP option
An ELSS tax-saver mutual fund, like with all other mutual funds, comes with the Systematic Investment Plan (SIP) option. This means you can invest small amounts of money periodically and come closer to meeting your financial goals. You can start an SIP for an amount as low as Rs. 500.
Even if you invest in ELSS mutual funds through the SIP option, you can still avail the section 80C tax deduction. So, whether you invest Rs. 1.5 lakh in a lumpsum or as an SIP of Rs. 12,500 per month, you get to capitalise on the tax-saving benefit.
The bottom line
Before you invest in ELSS funds, make sure to speak to your accountant or financial advisor as the section 80C tax benefit is only available in the old tax regime. If you are following the new tax regime with the lower tax percentages, you won’t be able to avail this deduction.