What is an Equity Linked Savings Scheme (ELSS)?

An Equity Linked Savings Scheme (ELSS) is a diversified equity schemes offered by mutual funds in India. This scheme can be used to save income tax of up to Rs. 1.5 lakh under Section 80 C of Income Tax Act 1961. ELSS can be invested using both SIP (Systematic Investment Plan) and lump sums investment options. It is a mutual fund that has to invest a minimum of 80% in equity shares. The balance 20% can be in debt, money market instruments, cash or even more equity. There is a three year lock in period for the ELSS mutual funds. For tax purposes, returns from an ELSS scheme are tax free.

Why an ELSS?

It can be seen that in the long run, equity gives a much higher inflation adjusted returns when compared with any other investment, except for maybe real estate. The top five ELSS funds have given returns from 22% to 26% compounded annually over the past five years. This is higher than the market over the same period which is at 19%.

Options with the ELSS:

ELSS has an option for salaried people with a tight budget for a monthly investment. The automatic investment from the bank through ECS makes it any easy way to invest. The people who want an income in between can opt for the divided option. It is particularly suitable for senior citizens.

Advantages of ELSS:

1. A minimum lock in of just 3 years which is considerably less in comparison to other mutual funds.
2. It can earn returns that are substantially higher than the rate at which we are investing.
3. Earnings once you done with the lock in period are 100% tax free.
4. The power of compounding will help you earn in multiples of your principal amount.
5. There is no maximum limit to invest.

Disadvantages of ELSS:

1. It is difficult to decide which fund to make your investment.
2. There are no guaranteed returns, as this is an equity based mutual fund which makes it subject to market returns; therefore it is not possible to confirm whether or not you will get any returns.
3. A ton of documentation is required at first.
4. Most mutual funds won’t accept investments from people living in Canada and the US.
5. There is also no premature withdrawals that are allowed.

Investment Returns Lock-in Period Tax on Returns
5 Year Bank Fixed 6% to 7% 5 years Yes
Public Provident Fund(PPF) 7% to 8% 15 years No
National Savings Certificate 7% to 8% 15 years Yes
National Pension System(NPS) 8 % to 10 % Till Retirement Partially Taxable
ELSS Funds 15 % to 18 % 3 years Partially Taxable

What should you look in an ELSS fund before investing?

A thorough research must be done when you invest in an ELSS fund. You must look at the long term performance of the fund before putting your money in it. Fund details like the fund manager’s investment approach, portfolio of the fund, the expense ratio of the fund and how volatile the fund has been in the past must be looked closely.

ELSS success depends on the tax treatment:

High inflows into ELSS funds are determined by the performance of the stock market in general. If an investor gets better tax – adjusted returns from other investment avenues like debt, he will prefer to go for this as risk is lower. Over a long term, ELSS funds are the best tax saving instruments, especially if you are an inventor who can take on high risk. The success of this category of mutual funds depends on the tax treatment it receives under the DTC.

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