Equity linked savings schemes (ELSS) are mutual fund investments that also provide tax savings. ELSS funds are invested entirely into the equity markets, thereby providing good opportunities for growth. However, ELSS schemes also carry the risks associated with the equity market, and there's no guarantee of any fixed returns.
Tax benefits of ELSS
You can get tax benefits of up to ?150,000 per year by investing in the various ELSS schemes. You don't have to pay tax on any dividends earned through ELSS investments. Also, there's no tax on withdrawal of ELSS investments. Among all the tax-saving options, ELSS has the potential to generate maximum returns.
Withdrawal of ELSS
ELSS investments have a lock-in period of 3 years, so you cannot withdraw money until that time. When you compare with other tax-saving instruments, the lock-in period of ELSS is the lowest. After three years, you can continue to stay invested as ELSS doesn't have an expiry period.
How to invest in ELSS?
You can invest in ELSS either as a lump sum or through a Systematic Investment Plan (SIP). If you choose a SIP option, a fixed amount will be deducted automatically from your bank every month towards ELSS. You can set a SIP for as low as ?500. Note, that with a SIP option each monthly instalment will have a separate lock-in period of 3 years.
Who should invest in ELSS?
ELSS is more suited for investors in the early- or mid-career stage as they will have enough time to make a decent return irrespective of short-term market fluctuations. ELSS is not ideal for people about to retire as typically their priority is the safety of their capital and stable returns.
How to choose an ELSS scheme?
You should select an ELSS scheme based on the returns generated over a period of 3- to 5-years. Also check the track record of price fluctuations. You should opt for funds that offer a balance of high returns and stability.
Advantages of ELSS as compared to National Savings Certificate (NSC) and Public Provident Fund (PPF)
Main advantage of ELSS is its short lock-in period. Maturity period of NSC is 6 years and PPF is 15 years.
Since it is an equity linked scheme earning potential is very high.
Investor can opt for dividend option and get some gains during the lock-in period.
Equities over a longer time frame have the potential to outperform traditional instrument like NSC and PPF.
Disadvantages of ELSS
Risk factor is high compared to NSC and PPF.
Premature withdrawal is not allowed but it is allowed in other instruments in some specific conditions.