ELSS or equity-linked savings schemes are equity funds which are designed to offer tax benefits under section 80C of the Income Tax Act. ELSS provides you with high returns compared to fixed deposits and public provident funds because they primarily invest in equity. They come with a low lock-in period of 3 years compared to other tax-saver investments. The three-year lock-in period qualifies for a tax exemption under section 80C of the Income Tax Act which allows maximum tax exemption of ₹1,50,000. ELSS offers returns between 12-18% compared to other tax saver investments, however, the returns are subject to long-term capital gains tax at 10%.
How you can reap the ELSS benefits
When investing in ELSS is it important you begin investing early and pick the right investments. If you pick the wrong investment you would be stick to your investments for the next three years. If you begin early you would have time to pick out the right investments and they will have time to compound. ELSS comes with the lowest-lock in period and you can reduce your taxes by investing in these schemes. If you have a high-risk appetite these are the right investments for you like 80% of the capital is put in equity. Having said that it is important you do not pick funds based on its short-term performance (six-month to one-year returns) and it holds true for all mutual funds schemes.
Your investment philosophy should match with the fund manager’s objectives. For IE. If the fund manager takes high risks with his investments and you are a conservative investor then there could be a problem, so it is important both the objectives are well aligned. ELSS has both growth and dividend options to choose, it is important for you to remember if you opt for the dividend option it will come out of your own money, so only if you need a second income should you pick a dividend option. If you are looking at creating wealth you should invest in the growth option and not pull out your money even if your lock-in period is over and if the scheme isn’t performing well.
It isn’t advisable to gather too many ELSS funds or switch funds every three-years, doing so could only take away the wealth creation ability a fund may have. Also redeeming a fund after the 3-year period isn’t compulsory. This helps you to benefit from the power of compounding in the long-run.The only disadvantage is the tax benefits are limited up to ₹1,50,000, having said that if you are a conservative investor it is best you choose other safe options available in the tax-saver category.