Equity Linked Savings Scheme (ELSS): Unlocking a tax saving option that has an edge over traditional saving instruments

From PPF, LIC to mutual funds, there are several investment instruments that help you not just save money or let you grow your fund, but also allow you to save taxes. With the year drawing to an end and it is about time that you declare your investment, many must be wondering about the best possible investment schemes that help them save money in taxes.  

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Though there are several government-run saving schemes that can come handy with your situation now, but it is ELSS (Equity Linked Savings Scheme ) that stands out from other saving instruments. Sorbh Gupta, Fund Manager, Quantum Tax Saving Fund, tells you why ELSS unlocks a saving option that has an edge over others.  

Lowest lock-in period & tax benefit under Section 80 C

Tax saving is an option given by the government under Section 80C, wherein you have multiple options like PPFs, Life Insurance, etc, says Sorbh Gupta. . In 2005, the Government allowed the launch of a mutual fund scheme category called the ELSS - Equity Linked Savings Scheme, which is like a typical equity mutual fund but comes with a lock-in for 3 years, which as compared to other tax saving options under section 80C has the lowest lock-in period,” Sorbh said when he started his discussion around various Tax Saving avenues available.

Opportunity to create wealth through exposure in equities

Since it is an equity-oriented mutual fund under Section 80C, you can claim tax benefits up to Rs. 1.5 lacs and save based on the tax slab. "This invested amount goes to pick decent stocks and tends to help in wealth creation over time. So, in a nutshell, you not only get upfront saving with immediate tax relief but can also create wealth over time with the investment in equity as equities has the potential to earn long term risk adjusted return. .  

Best suited for salaried or self-employed individuals

While equity does require a risk appetite and ELSS also has a 3yrs lock-in period, it is best suited for salaried or self-employed people who want to invest and save taxes, said Gupta. "It is one of the most popular investment options for people in jobs who are looking to invest and save taxes under Section 80C," he said.  

Shorter lock-in and power of compounding  

Sorbh went on to compare the edge ELSS has over traditional tax-saving instruments. ELSS has a shorter lock-in of only 3yrs..

“When it comes to investing, most people today don’t understand the benefits of long-term compounding capabilities of equity investing or the benefits of staying invested for a longer duration rather than exiting or moving. ELSS brings discipline in equity investing as it has a lock-in period of 3-year, and you can actually see the power of compounding enhancing in this duration. It can help you understand the benefits of staying invested and build in a culture of staying invested for a longer period.”  

'Looking for tax saving options in February March not wise'

Sorbh discussed the ideal approach towards tax-saving, “Most people look for tax saving options in February/March when their employer asks for investment declarations which is not the right approach. The best way to do an ELSS is to start somewhere in April with SIP, so you can average out market movements and not compromise your returns. Most important is you need to keep in mind the orientation of the fund manager handling the fund and his philosophy. “  

Shifting trend from traditional saving instruments to ELSS  

Sorbh continued, “We are seeing the keen interest of investors in ELSS vs other traditional tax-saving instruments; people now understand the importance of real rate of returns, inflation. People are getting more educated, and that is helping anchor thoughts of long-term investing with equities and mix that up with ELSS, it also helps save tax.”

How much fund one should allocate to ELSS?  

He says ELSS should be linked to you financial goals and needs. "May it be any financial goals like your child’s education, retirement, when you are investing your money for long-term, equity mutual funds are the ideal option, since they have the potential to provide long term risk and adjusted real return. A portion of that should be into ELSS. It is a way of investing in equities where one saves taxes as well. This allows the long-term creation of wealth with tax benefits. Investors should not consider ELSS as only a 3-year investment, but rather a part of your goals, part of your equity investing and that must continue regardless. Tax benefit may stop after the lock-in period, but the compounding of investments will continue as per change in markets.”

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)