Section 80C of Income Tax Act has approved some of the saving options as tax saving instruments to an individual or a Hindu Undivided Family (HUF). Any amount invested up to Rs 1,50,000 or below in one or more tax saving instruments during the financial year by an individual or a HUF can be claimed as the deduction from their total taxable income.

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Mutual fund houses offer Equity Link Saving Scheme (ELSS) which qualifies as tax saving instrument under section 80C of Income Tax Act. Under this scheme, the mutual fund primarily invests in the equity market to enable growth over the long-term. These mutual fund schemes can be invested in throughout the year, but some people consider ELSS as a last moment decision when they do not have sufficient investments to showcase for the existing financial year.

Analyze your financial goal before investing in ELSS. Knowing your financial goal is important and then figuring out a rough estimate and set a timeline for each goal. Decide on the periodic payment based on the goal.

The following are the benefits of ELSS:

1. Lowest lock-in period: Lock-in period for ELSS is three years while other tax saving instruments like NSC, PPF etc has a lock-in period of anywhere between 5 to 15 years. It is very difficult to decide which fund to make your investment in.

2. Wealth Creation: ELSS primarily invest in the equity market, thus it has potential to give a better return than other tax saving option. ELSS are considered ideal for the first time investor in the stock market. The mandatory lock-in period would help investors to weather the volatility associated with the stock market. Also, since the fund manager in ELSS is not worried about huge unexpected redemption, he/she can adopt a buy and hold strategy to maximize returns. These funds are subject to market risk.

3. Systematic Investment Plan (SIP): If an investor starts a SIP in ELSS at the beginning of a financial year, he/she is likely to earn a better return than investing in the last few months of the financial year. A lump sum amount is not the ideal way of going for such investments as it might be very dear to your wallet. Documentation is required at first stage.

4. Taxability of Return: Returns generated from ELSS funds would attract Long Term Capital Gain Tax (LTCG) at the rate of 10% if the capital gains exceed Rs 1 Lakh in a financial year after the Union Budget 2018-19. There are no guaranteed returns, as this is an equity-based mutual fund which makes it subject to market returns.

5. Maturity date: Most tax saving investments such as PPF, tax saving deposit come with a maturity date. PPF matures in fifteen years and it can be renewed for another five years. ELSS has no such fixed maturity date or period.

There are three options while investing in ELSS:

Growth option: Investor will not get any benefits in the form of dividends. The investor will only receive the benefits at the end of the tenure which will help appreciate Net Asset Value (NAV) and thus multiply profits.

Dividend option: Under this option investor gets timely benefit of dividends. The best part is that any dividend which the investor receives is not liable for taxation by the government and investor will receive the entire amount.

Dividend reinvestments option: Investor has the option of giving back the dividends received in order to add to the NAV. An investor can gain substantially if the market is performing very well during the three-year tenure of the lock-in period.

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Under ELSS, the mutual fund primarily invests in the equity market to enable growth over the long-term  
ELSS primarily invest in the equity market, and has potential to give a better return than other tax saving option

Source: DNA Money