ELSS investments help you save tax as well as build your wealth over time. Got questions about ELSS? We’ve got all the answers for you. Keep reading!
Equity-Linked Savings Scheme, commonly referred to as ELSS, is an ideal investment for investors of any type that offer the twin advantage of tax savings and wealth creation. Yay, two birds, one stone! New to ELSS? Don’t worry! This article addresses all the questions frequently asked by ELSS newbies.
What is ELSS?
As mentioned earlier, ELSS or Equity-Linked Savings Scheme is a type of Mutual Fund investment that helps you save on taxes as well as helps you build wealth over a period of time.
Is there a lock-in period for ELSS?
Yes, ELSS investments have a lock-in period of three years. Compared to the other tax-saving options, ELSS offers the lowest lock-in period, thus, making it a lucrative tax-saver investment. That said, you should keep in mind that you’ll not be able to withdraw funds from your ELSS investment before completion of the three years, not even by paying a penalty. In short, you have to remain invested in the ELSS funds for three years.
Additional Reading: Why Is ELSS A Popular Choice Among Investors?
How much tax can one save via ELSS investments?
You can save up to Rs. 46,800 in taxes by investing in ELSS funds. ELSS is one of the most preferred tax-saver investments among the options available under Section 80C. Section 80C of the Income Tax Act allows taxpayers to claim tax deductions up to Rs. 1,50,000 by investing a part of their income in any of the investment options listed under the section. Other options under Section 80C include Life Insurance, Sukanya Samriddhi Yojana (SSY), Public Provident Fund (PPF), 5-year bank FDs, National Savings Certificate (NSC), Senior Citizens Savings Scheme, Stamp duty and registration charges, Home Loan principal repayments, and more.
How does one invest in ELSS?
It’s pretty simple! You can either choose to invest a lump sum amount or you can opt for the SIP (Systematic Investment Plan) route. With SIP, you do not have to cough up a huge chunk in one shot. Instead you can invest a small amount, starting from just Rs. 500, on a monthly basis.
Additional Reading: The Layman’s Guide To Investing In ELSS
Should you opt for the SIP route or lump sum investment?
You can opt for either of the two, as long as you start investing as soon as possible. However, if you ask us our genuine opinion, we’d totally vouch for the SIP route. Why, you ask? Well, apart from teaching you financial discipline when it comes to saving and investing on a regular basis, SIPs offer quite a few more advantages over lump sum investments.
SIP investments provide the rupee cost averaging advantage, while, at the same time, reducing the effect of market volatility on your investment over the term period. Plus, with SIPs, you do not have to stress over arranging a lump sum in one shot.
What other benefits do one get by investing in ELSS?
Here’s a list of benefits that you can enjoy with your ELSS investment:
- Compounding benefit in the long run since ELSS funds invest in the equity market
- Returns are tax-free since they are long-term capital gains
- Shortest lock-in period of three years compared to other investments
- Rupee cost averaging advantage
- Efficient tax planning
- The advantage of investing in monthly installments instead of the pressure of parting with a huge chunk in one go
- Instils the habit of saving and investing daily
How does ELSS compare with the other popular tax-saving investment options?
Out of the many tax-saving investment options available, ELSS, PPF and Tax-saver FDs are the popular choices. Here’s how they stand against each other.
| Features | ELSS | PPF | FD |
| Lock-in Period | 3 years | 15 years | 5 years |
| Minimum Investment | Rs. 500 | Rs. 500 | Rs. 100 |
| Maximum Investment | No limit | 1.5 Lakhs | 1.5 Lakhs |
| Returns | Market-linked. 15% to 18% | 7% to 8% | 5.5% to 7.5% |
| Deduction Eligibility Under Section 80C | 1.5 Lakhs | 1.5 Lakhs | 1.5 Lakhs |
| Tax On Returns | No tax on dividends and capital gains | No tax | Taxable |
| Risk | Risky | Safe | Safe |
| Premature Withdrawal | Not allowed | Partial withdrawal allowed after 6 years | Not allowed |
Watch This: How ELSS Funds Can Be Great For You | Save Tax & Grow Your Wealth
Now that we’ve answered all the common questions asked about ELSS investments, we’ve got a few pointers for you to keep in mind before you start investing in ELSS. Here you go.
Start early
Last minute investments in ELSS funds can lead to errors in judgement – you may end up with a poorly-performing fund. Remember once you’ve made an investment, you’re stuck with it for three years. To avoid such mistakes, we suggest that you start your investments early, so that you’ll have enough time to choose the right fund/s to invest in.
Overlook short-term performance
When it comes to Mutual Funds, you should never just look at the last year’s return and choose a fund. Instead you should check at least the last five year’s returns and see if there is a consistency in the performance of the fund before you invest in it.
Do not ignore your risk appetite
A conservative investor must never invest his funds in extremely risky funds. While choosing your funds, you must always take your risk appetite into consideration before you invest. If you do not want to take too much risk, you should aim to invest in balanced funds even if the returns aren’t as lucrative as those the high-risk funds offer.
No redeeming funds after the lock-in period
Some folks have the habit of pulling out their funds once the lock-in period is over. But if the ELSS funds are performing well in the market, then it doesn’t make sense to pull your funds and close the investment. Also, time and again, investment experts have advised that one must stay invested in ELSS funds for five to seven years to get good returns. Remember that ELSS funds invest majorly in equities. And these work well in the long term mostly.
Additional Reading: ELSS 101: To Invest Or Not To Invest?
Now that you are all wised-up about ELSS investments, maybe it’s time you started investing. If you aren’t up for taking some risk and investing in equities, you may want to check out these Fixed Deposit deals.
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