As the tax-season dawns upon us, there is an urgent need felt for tax-saving investments. And even though retail mutual fund investments in equity funds continue to dominate the Indian mutual fund market scenario, the contributors to ELSS (Equity Linked Savings Scheme) still only constitute 14% of the total subscribers of mutual funds in India. When it comes to tax-saving, the investors are still drawn largely towards the traditional methods of investing like PPF, tax-saving FD. ELSS is a far superior investment vehicle both in terms of returns and the lock-ins. Allow us to decode ELSS for you.
What are ELSS funds?
ELSS is an equity linked fund which provides tax-saving benefits under section 80C of the Income Tax Act. ELSS comes with a lock-in horizon of 3 years minimum, which is far lesser than the tax-saving sibling tools like PPF where the lock-in is 15 years or 5 years in case of tax-saving FDs. Which effectively means that if you are in the 30% tax bracket and need to invest 1.5 lakhs in a ELSS mutual fund, it will result in a tax saving upwards of ~Rs 46,350.
For the sake of understanding, let us hypothetically assume that you invested Rs 1.5 lakhs in an ELSS fund with a rate of return of 15%. Let us see how the money transforms over a period of 10 years-
The above returns have been calculated assuming the amount saved from tax i.e. ~Rs 46,000 has also been invested into equity mutual funds, generating additional returns. Hence, an original investment of only 1.5 lacs has translated into a maturity amount to Rs 7.9 Lacs. In other words, the principal amount has increased itself to almost 400% in 10 years.
Moreover, the money is free to be withdrawn anytime after the initial lock-in of 3 years. Both factors not applicable to any of the other tax-saving instruments. ELSS provides the investor with an opportunity to have the cake and eat it too. If there is no dire need for money, it is advised to leave the money be in the fund for a longer period so as to benefit from the power of compounding of the best ELSS funds.
Highest Returns with Lowest Lock-ins – Amongst all the tax saving contenders, ELSS is hands down the most profitable with one of the highest returns and the lowest lock-in period.
Lumpsum and SIP – Whether you want to avoid the last-minute tax hustle or you are just more comfortable with monthly instalments, whatever be the reason ELSS offers SIP as an option to invest.
Start with less – You may start the investment with as low as Rs 500.
Wealth creation while saving tax – ELSS is a unique combination of benefits from the mutual fund diversification, equity linked higher returns and tax saving. It grows your money while saving it from tax.
ELSS is that friend who looks out for you in every way. Do you now feel you might have befriended the wrong investment tools? It’s never too late, they say! Save Tax Now!!! Reach out to our expert financial advisors at WealthApp for further assistance and guidance.