ELSS (Equity Linked Savings Scheme) is a diversified equity mutual fund. It is one such investment option that provides tax saving benefits along with higher growth potential over time compared to other tax saving options.
With so many tax saving options available, choosing the right one depends on the investor’s financial goal and his/her risk appetite. However, we should always keep in mind that whatever option we chose, it should be able to beat inflation and create wealth and not just save tax. ELSS can be an ideal option here for many. Below mentioned points will let one understand features of ELSS and its comparison with other tax saving options.
1. Investments in ELSS get tax deduction benefit of up to Rs. 1,50,000 under Sec 80C of the Income Tax Act 1961.
2. ELSS being an Equity Oriented investment product is susceptible to market volatility and carry similar risk-return profile as equity funds. But for the same reason it has the potential to provide inflation beating capital growth over long term and outperform other tax saving options in terms of wealth creation.
3. ELSS comes with a lock-in-period of 3 years. But if you compare it with other tax savings options it has the lowest lock-in-period (PPF – 15 yrs., NSC – 5/10 yrs., ULIP- 5 yrs., Bank Deposits – 5 yrs.)
4. While investing in ELSS, investors can opt for growth or dividend option. With the growth option the investment grows with cumulative effect till the investment is redeemed and with the dividend option one can have cash flow (as an when dividend is declared by the fund) even during the lock-in-period.
5. SIP can be considered a better way of investing into an ELSS fund. With SIP a fixed amount is invested each month. By doing so one ends up buying more units when the market is down and fewer units when the market is up. Thus, over time, this results in averaging out the cost per unit. With SIP one can start as low as Rs. 500 per month.
ELSS is a good option (by most measures a better option) to save tax and create wealth over a long period of time.
Note: Consider tax saving as a goal and plan it early during a financial year rather than end up making unsuitable decisions in a haste by waiting until the last moment
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