What Is ELSS?
ELSS OR Equity Linked Savings Scheme, as the name suggests, is an equity based mutual fund. Through ELSS, one can invest in tax saving mutual funds. There are many advantages to investing via ELSS like:
- Avail tax deductions under Section 80C
- Your principal amount gets multiplied due to the POWER OF COMPOUNDING
- The returns you earn within the lock in period are not TAX FREE
- Substantially HIGHER RETURN
- Minimum lock in period of 3 YEARS
ELSS is an equity diversified fund & investors enjoy both the benefits of capital appreciation as well as tax benefits. But for long term, ELSS generate better returns though with slightly moderate risk.
Benefits of ELSS
Here's some points of advantage one can derive by investing in ELSS:
Equity's Potential in Getting Return
Equities are known for giving potentially higher long-term gains compared to other tax saving instruments available in the market. So, with ELSS, one can more effectively & efficiently construct a portfolio keeping in mind the long-term perspective.
Tax Saving Instruments
Under section 80C, investments in ELSS are exempt from tax. And the returns received from equity funds after the end of 1 year is also tax free. As ELSS funds come with a lock in period of 3 years, the returns, dividends, capital gains also become tax free.
If you want to save money & earn higher return of approximately 15 percent & more than ELSS funds are the way to go.
Financial Goal Planning
Investors can achieve the set goals of buying their dream homes, children’s education, car, wedding and much more”.
Less Lock in Duration
ELSS funds have a 3-year lock in period, which is less as compared to other investment avenues like PPF, FDs, NSC.
One has an option of either investing in one go i.e. lumpsum amount or can opt for SIP. SIP or Systematic Investment Planning is where a certain amount gets deducted from your account on a monthly basis.
Debt MF V/s Fixed Deposits
It needs to be mentioned that in Fixed Deposits interest amount net of taxes gets accrued. An example of Rs.50000/- invested at 8% annual interest (compounded quarterly = 4 times), assuming that the client is in 30% tax bracket, the net yield is 5.95%.
Debt Mutual Funds, gives a return of 8%, no tax is deducted on accruals, capital gains tax is applicable on sale/transfer of Debt MF units, so at end of 2 years, 16.64% absolute gains are available which are subjected to capital gains tax of 10%, i.e. 14.97% absolute returns in two years, 7.35% CAGR returns per annum (to check the validity of this point)
Bank will deduct 10% TDS. 90% of interest gain will get accrued, so effectively, it is 7.2% rate of interest gets accrued. 7.2% * 20% tax payable at the end of two years, gives an yield of 5.7988%.