From the point of view of an ordinary investor, Tax Planning and that too in an effective manner seems to be a tedious task.There are various Tax saving tools and alternatives that help to reduce your taxes substantially.

The only thing you need to keep in mind is how to utilise the various tax saving methods in the most effective manner so as to yield maximum returns along with reducing your taxes. Under Section 80 C of The Income Tax Act, you can claim deductions from your Taxable income by putting your money in eligible investments.

One such eligible Investment and the most popular TAX SAVING OPTION is ELSS or Equity Linked Savings Scheme.

Through this blog we will try to cover all the aspects,advantages and disadvantages of parking your funds in ELSS or Equity Linked Savings Scheme.

What is ELSS or Equity Linked Savings Scheme ?

ELSS is a diversified equity mutual fund where the investors enjoy the dual benefits of capital appreciation as well as taxation benefits. In ELSS,the majority of funds are invested in equities. ELSS has a lockin period of 3 years from the date of investment i.e. if you start investing in SIP today,your investment shall be locked in for 3 years from your investment date.

If units are purchased in May 2016 they can be redeemed in May 2019 only, likewise units purchased in June 2016 can be sold in June 2019 only.

Advantages of Investing in ELSS :

1. Dividend or Growth Options : You can invest in Dividend or Growth options based on your convenience and goals.In Dividend Schemes,the investors get regular dividend as and when it is declared on the mutual fund.While in Growth Schemes, investors get a lumpsum amount on the expiry of 3 years.

2. You can claim Tax Benefit U/s 80 C : By investing your funds in ELSS ,you can claim a tax deduction U/s 80 C of The Income Tax Act upto a maximum of Rs.1.5 lakhs. Although,you can invest a higher amount in ELSS but the deduction shall be restricted to the total limit U/s 80 C i.e.Rs.1.5 lakhs during a financial year.

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3. No tax on Long Term Capital Gains : In case of ELSS, no tax is levied on the Long term Capital Gain i.e. the returns including dividend and capital gains from ELSS in the long run are tax free.

4. Lockin Period : ELSS has a shorter lockin period of 3 years as compared to other long term Investment options like PPF, NSC.

5. Good returns in Long run : There is always some risk factor attached,but these funds usually tend to perform well if invested for a longer duration.Being an equity linked scheme,the earning potential is normally high.Based on the historical data,the best performing funds normally tend to yield returns ranging from 12% to 16 %.

Disadvantages of Investing in ELSS :

1. Risk Factor : The biggest disadvantage of investing in ELSS is the RISK FACTOR involved in it. So,these are best suited for the ones who can afford to take risk. ELSS is associated with Equity and Equity with risks,so there is some risk always attached to ELSS.

2. Premature withdrawal not allowed : In case of ELSS, you cannot withdraw the money invested before the maturity period.

Hence,ELSS is best suited for investors who are willing to take risk and want to plan their long term investments.

You can opt for SIP(Systematic Investment Plan) in ELSS that can inculcate a habit of investing and build a good corpus for you.It is often considered as a good option for youngsters and career starters because with the magic of compounding,you can generate high returns if investments are done systematically at an earlier stage.

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But,SIP in ELSS or Equity Linked Savings Scheme seems to be confusing due to its lock-in period. If you invest money for a period of 3 years in ELSS,the long term capital gain is tax free.

So,talking about SIP in ELSS, you have to consider each instalment separately for calculating long term capital gain.

Simply stated,when you invest in ELSS through SIP mode your each instalment is considered as a fresh investment and hence gets locked in for a period of 3 years.

For details on SIP you can go through What is SIP? What are its benefits ?


Comparison between PPF and ELSS -Which is better ?

PPF or Public Provident Fund and ELSS or Equity Linked Savings Scheme are both good long term investment options.However,ELSS is a riskier option but can yield better returns in the long run.However,PPF is risk free and there is a certainty as to fixed returns.If you have surplus funds,you can include both of them in your investment portfolio.

You can evaluate which one is better ELSS or PPF based on the following factors :-

1.Lock in Period : In case of PPF the lockin period is 15 years or partial withdrawl in the 7th year.But,in case of ELSS the lockin period is 3 years only.

2.Rate of Interest : PPF amount yields a fixed rate of interest. PPF interest rate was 8.1% for first two quarters of F.Y.2016-17. PPF interest rate for Oct’16 to Dec’16 is 8 % p.a.While in ELSS there is no fixed return,but normally you tend to get good returns if amount is invested for longer duration.

3.Deduction U/s 80 C : Both PPF and ELSS are eligible for a tax benefit U/s 80 C upto a maximum of Rs.150000.

4. Maturity Amount Tax free : Both PPF and ELSS offer similar tax benefits.The maturity amount of PPF is tax free,similarly returns on ELSS are also tax free.

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4.Risk Factor : In PPF there is no risk ,you will get the accumulated balance of your investment and interest thereon at maturity.But,in ELSS there a risk is involved and you cannot be sure about the returns.

PPF provides stability and ELSS gives you growth opportunities so if you have excess funds,you can invest in both.But,you need to be clear that if you allocate your funds in both PPF and ELSS ,the Total deduction U/s 80 C cannot exceed Rs.1.5 lakhs per financial year.

But,ELSS is primarily considered one of the best investment tool because of its low lockin period and high returns in addition to the tax benefits.

You can well imagine the difference in the maturity amount if :

  • You invest in traditional risk free methods like PPF or NSC that give fixed returns or
  • You invest in ELSS, a risky option but reaps higher benefits.

Also go through our popular blog post PPF or Sukanya Samriddhi Yojana -Which is better ?

So,keeping in mind all the above factors,you can decide as to which option is best for you.

Check your financial objectives, your risk appetite and above all your investment horizon before investing.

Choose among the various Asset classes available and have a diversified financial portfolio by investing cautiously to get the maximum possible returns.

To grab details about other Investments you can refer Best Short Term Investments and Best Long Term Investments.

Any points you wish to add upon, feel free to share the same in the comment section below…

Give your valuable feedback and opinion on ELSS to help the potential investors in their decision making.