Five reasons why you should invest in an ELSS this year

The most tax saving exercises take place in the last three months of the financial year - between January and March. There are plenty of tax-saving investment options available to you to claim a tax deduction: Public Provident Fund (PPF), National Savings Certificate (NSC), Tax-saving five-year term deposit, National Pension Scheme (NPS), among others. Here we would tell you why Equity Linked Savings Scheme (ELSS) or tax saving/planning mutual fund schemes are the best tax saving option for you.

Tax benefit under Section 80C
No surprises here. Your investments in ELSS are eligible for a tax deduction of up to Rs 1.5 lakh from your gross total income under section 80C of the Income Tax Act. Though you can avail a maximum deduction of Rs 1.5 lakh under the section, there is no limit on the amount you can invest in these schemes. You are free to invest more than Rs 1.5 lakh but the extra amount would not fetch you a deduction. In short, investing Rs 1.5 lakh in an ELSS can help you save tax up to Rs 46,350 depending on the income tax slab applicable to you.

Lowest lock-in period

All tax saving investments typically come with a mandatory lock-in period. For example, Public Provident Fund (PPF), another tax saving instrument permitted under Section 80C, comes with a 15-year lock-in period. However, you are allowed to make partial withdrawals in PPF from the seventh year. Tax-saving term deposits have a lock-in period of five years. ELSS comes with a lock-in period of three years. You can sell your investments in ELSS (redeem in mutual fund lingo) after three years.

A word of caution: though ELSSs come with a lock-in period of three years, invest in ELSSs with an investment horizon of at least five years in mind. This is just to be on a safe side as ELSS invests predominantly in stocks. And stocks are risky and volatile in the short term.

Benefit from equity exposure
If you are a traditional investor who prefers tax-saving instruments that come with assured returns, you should consider investing in ELSS to take a small exposure to equity. ELSS are considered ideal for first-time investors to the stock market. The mandatory lock-in period would help investors to weather the volatility associated with the stock market. Also, since the fund manager in ELSS is not worried about huge unexpected redemption, she would be adopting a buy and hold strategy to maximise returns. ELSS category has returned around 18.84 per cent in the last five years.

In fact, you can devote your investments in ELSS for a specific long-term financial goal. Equity is considered the best investment option to fund long-term goals, as stocks have the potential to beat other investment options over a long period. They also may beat inflation by a wide margin. It is imperative that you earn more than inflation to create wealth. Otherwise, inflation would deplete the value of your corpus.

It is a better option even with 10 per cent tax
ELSSs or any equity mutual funds, for that matter, will not offer tax-free returns any more. From this year, long-term capital gains made from ELSSs would be taxed at flat 10 per cent. (The finance minster has re-introduced LTCG tax on long term capital gains of over Rs 1 lakh in the last budget) However, even after the new 10 per cent tax, ELSS would provide better post-tax returns than other traditional tax-saving investments like PPF, NSC, five-year FD, etc. over a long period.

No maturity date
Most tax-saving investments such as PPF, tax-saving term deposit, among others, come with a maturity date. The PPF account matures in fifteen years and it can be renewed for another five years. An ELSS has no such fixed maturity date or period. You can continue to hold on to your ELSS investments as long as you can.

Finally, it is true that ELSS comes with a bunch of benefits. That doesn't mean that you must invest in it blindly. You should invest in it if it meets your investment objective, horizon and the risk profile. That is if you can take a bit of risk and hold on to your investments for more than five years, you can consider investing in ELSSs. Investment experts warn you not to look at tax-planning exercise in isolation. It should always be a part of your overall financial plan.