- Tax Benefit – One of the primary reasons to invest in ELSS is to save tax. Investments in ELSS qualify for tax deduction under section 80C of the income tax act of 1961. Also any dividend or long term capital gain earned by the investor is exempted from income tax. Simply, your returns from ELSS become tax free. You can invest into ELSS and deduct upto Rs. 1,50,000/- from your taxable income to effectively reduce your tax liability.
2. Lock in period – It has dual benefits. Firstly the lock in period of ELSS is shortest as compared to other 80 C deduction options. Secondly, Pertaining to the performance of the mutual funds, good mutual fund portfolios are constructed for long term investments, however, they are not bound with the lock in periods. But in case of ELSS, the funds are locked in for at least 3 years. Which means, in ELSS fund you are obligated to stay invested for 3 years or more to exempt from taxes applicable on returns. This forcefully embeds a good habit to stay invested for a longer period.
3. Expected returns – Average ELSS return has been 22.99% (3 years), and 1 year being 40% on average. VS other schemes of 80 C like PPF, EPF, NSC etc give 8-9% returns. Although in ELSS funds there will be short term volatility but choosing based on proper study will be very fruitful.
4. Saving habit- ELSS schemes allow you to invest systematically (via SIP) with as low as Rs. 1000 per month. Your savings turn into your investments. This nurtures a habit of continuous investing. Since there’s a lock in period of 3 years, if you start an SIP in Equity Linked Saving Schemes, the returns for your SIP amounts will be generated every month after 3 years of the first investment. Besides, the returns will be exempted from your taxes.
5. Opportunity to invest in equity while saving- ELSS also allows you the benefits of equity mutual fund schemes to ride the growth cycle of stocks in your ELSS portfolio. Whereas other 80C savings can give about 8% of returns, investing in equity may produce higher returns in favorable situations in the stock market. In the rising economy like India, a good portfolio with quality stocks may reap higher returns.