What are ELSS Funds? Best Tax Saving Investment Option
Investing in ELSS mutual funds has two advantages: tax reductions and long-term wealth accumulation. ELSS mutual funds have the shortest lock-in period of all tax-saving investments, at just three years, and have the potential to produce the greatest returns among 80C options.
What exactly are ELSS funds?
An open-ended equity mutual fund that invests largely in equities and equity-related items is known as an Equity Linked Saving Scheme (ELSS). They are a subset of mutual funds that qualify for tax deductions under Section 80C of the Internal Revenue Code of 1961. As a result, they’re known as tax-advantaged mutual funds.
What Are the Advantages of Investing in ELSS Mutual Funds?
- ELSS mutual funds allow investors to obtain fair returns while avoiding taxes. These funds invest at least 80% of their assets in the stock market. As a result, the potential returns are closely related to the stock market’s success. If you want to save for long-term goals like retirement, this could be a good alternative.
- Every year, you can claim a tax deduction on investments up to Rs. 1.5 lakh. A three-year lock-in term is also required for these funds. Among all tax-saving investing options, this has one of the shortest lock-in periods. ELSS funds are a popular investment option because of all of these advantages.
What is the perfect time to buy an ELSS fund?
To save on tax, many investors invest in Equity Linked Savings Scheme funds at the end of the year. This might not be the best option. Tax savings are an important factor to consider when investing in these funds. However, it must be the major motivation for investing in them.
The easiest method to get the maximum benefit of such funds is to invest for the long term. So, at the start of the year, determine your financial goals and invest accordingly through Systematic Investment Plans (SIPs). Investing consistently throughout the year can help you lower your market risk and create wealth over time.
Equity Linked Savings Scheme Features (ELSS funds)
Among its most popular features are:
A brief period of confinement
Longer lock-in periods apply to popular tax-saving instruments like the Public Provident Fund (PPF) and tax-saving Fixed Deposits (FDs). , for example, PPF has a 15-year lock-in period, whereas tax-saving FDs have a five-year lock-in period. ELSS funds, on the other hand, have a shorter lock-in period of only three years.
Returns exceeding inflation
Funds in the Equity Linked Savings Scheme invest primarily in the stock market. As a result, they have the potential to earn bigger returns than other typical tax-saving strategies.
Section 80C allows you to save tax on investments up to Rs. 1.5 lakh each year. Long-term capital gains (LTCG) of up to Rs 1 lakh are tax-free. However, if your returns surpass Rs. 1 lakh in a given year, you would be subject to a 10% LTCG tax. Despite this, ELSS continues to be a popular tax-saving investing option among Indians.
Other tax-saving investments vs. equity-linked savings schemes
There are several tax-saving investment options accessible today. The Public Provident Fund (PPF), Tax-Saving Fixed Deposits (FDs), and the National Pension Scheme are all examples of this.
Not only ELSS funds have the shortest lock-in period, but they also have the ability to earn decent returns. They do, however, come with a larger risk of failure. However, this can be minimized by taking a long-term strategy of investment. You spread your risk over a longer period of time and profit from the possibility of higher returns.
Unlike options like FDs, where you must invest in a flat sum, SIPs allow you to invest over time. With a monthly commitment of Rs. 500, you can start your financial adventure. When you invest in ELSS through a SIP, you have a better chance of earning decent returns and developing investment discipline.
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