What are the advantages of investing in ELSS?

We invest our hard-earned money in various investment avenues intending to earn good returns. One such option – ELSS investment invests 80% of its corpus in equity and equity-related instruments. Being a market-linked investment, ELSS mutual funds can offer good returns. Investors who know what is ELSS swear by its potential to grow wealth in the long term.

This article helps you understand the advantages of investing in ELSS.

Benefits of ELSS mutual fund investments

  • Tax-saving

ELSS are tax saving mutual funds that enable you to avail a deduction under section 80C of the Income Tax Act, 1961. You can claim a tax benefit of up to Rs.1.5 lakh by investing in ELSS. This makes ELSS a preferred option among investors who aim to save tax and earn returns from equity funds.

  • Lowest lock-in period

ELSS comes with a three-year lock-in period; lowest among most tax-saving instruments, such as public provident fund, long-term deposits, etc. Besides, ELSS gives investors the flexibility to withdraw funds in the short-term. However, you can invest beyond the lock-in period to reap maximum ELSS benefits.

  • Higher returns

ELSS funds invest a significant portion of the corpus in equity and equity-related instruments. Hence, they can offer higher yields compared to other tax-saving investments. Historically, ELSS funds have provided returns between 15 to 20 per cent. While other tax saving options offer returns anywhere ranging from 7 to 10 per cent. Better profits, coupled with the benefit of compounding over three years, makes ELSS a preferred investment choice.

  • Lower tax on gains

Since ELSS funds have a minimum investment lock-in of three years, you cannot withdraw funds before its maturity. Any gains arising from the sale of ELSS mutual funds are therefore long-term in nature. Long-term capital gains up to Rs.1 lakh arising from ELSS funds are exempt from tax.

Further, benefits above Rs.1 lakh are subject to a 10% tax. In contrast, short-term capital gains are taxed at a rate of 15%. This makes ELSS a tax-efficient investment avenue.

  • Benefit of compounding

When you invest in mutual funds for a longer duration of five to ten years, you can benefit from the power of compounding. Additionally, ELSS funds, by virtue of the three-year lock-in, aids in disciplined investing.

  • Invest via Systematic Investment Plan (SIP)

To invest in ELSS, you have two options – SIP or a lump sum. SIPs let you to invest a fixed amount monthly, quarterly, semi-annually or annually. You can set aside the SIP amount from your savings as per your convenience.

Conclusion

ELSS offers an excellent combination of a brief lock-in period, market-linked returns and greater flexibility. After understanding what is ELSS fund, you may want to consider investing in them. A well-diversified investment portfolio can help you generate enhanced benefits.

Author: Chakraborty

Dr Chakrabarty is the Chief Innovation Officer of IntuiComp TeraScience. Earlier she was Assistant Professor of Delhi University, a QS ranked university in India. Before that she has held research positions in IIT Mumbai, IIT Chennai and IISc Bangalore. She holds 2 patents and over 20 research publications in her name which are highly cited. Her area of research is in smart technologies, integrated devices and communications. She also has a penchant for blogging and is an editor of Business Fundas.