The key merits of Equity-linked Savings Scheme (ELSS)

Indian tax laws allow individuals to make investments that provide tax deductions of up to ₹1.5 lakhs annually under Section 80C.A popular choice among these tax-saver investment options is the Equity-Linked Savings Scheme (ELSS).

ELSS funds stand out for their short lock-in period and the potential to significantly lower tax burdens. In this article, let’s delve into the definition of ELSS mutual funds and explore the various merits of choosing them as a tax-saving investment option.

What are ELSS mutual funds and what are itskey merits?

At its core, an ELSS mutual fund is a type of equity-oriented mutual fund that offers tax benefits to investors. It falls under Section 80C of the Income Tax Act 1961, making investments in ELSS funds eligible for deductions of up to ₹1.5 lakhs from an investor’s taxable income in a given financial year. This not only aids in tax planning but also encourages individuals to participate in the stock market.

Here are five key merits of ELSS mutual funds:

1. ELSS funds have a lock-in period

Compared to other tax-saving instruments like Public Provident Fund (PPF) or National Savings Certificate (NSC), which have significantly longer lock-in periods, ELSS provides investors with quicker liquidity. Investors can access their invested amount after a lock-in period of three years.

2. Investors can save considerably on taxes

Investments in ELSS are eligible for deductions of up to ₹1.5 lakhs under Section 80C. Investors can reducetheir taxable income and earn potentially higher returns compared to traditional tax-saving options like fixed deposits or PPF.

3. Investors can earn high returns from ELSS funds

ELSS funds invest in equities that come with a certain degree of risk due to market fluctuations, but they have the potential to deliver substantial returns over time.

Who should invest in ELSS mutual funds?

ELSS mutual funds are an ideal choice for a wide range of investors, including:

1. Tax-conscious investors

If you are looking to optimise your tax planning and reduce your tax liability, ELSS funds offer an attractive option. By investing up to ₹1.5 lakhs in ELSS, you can avail of the maximum tax deduction under Section 80C.

2. Investors seeking higher returns

Those who aim for returns that outpace traditional tax-saving instruments should consider ELSS funds. The equity exposure of ELSS funds has the potential to deliver superior returns over the long term.

3. Individuals with a medium to long-term investment horizon

ELSS funds come with a lock-in period of three years, making them suitable for individuals with a medium to long-term investment horizon. If you can commit to staying invested for this period, ELSS can be an excellent choice.

4. First-time investors

ELSS is a great entry point for individuals new to mutual funds and equity investments. With professional management and the potential for tax savings, it provides a relatively straightforward way to start building wealth.

ELSS mutual funds are a versatile investment option suitable for a wide range of investors, from those looking to save on taxes to individuals seeking to grow their wealth over time. Investors can make informed decisions to meet their financial goals while enjoying the advantages of tax-saving investments by understanding the features and benefits of ELSS funds.