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Tax Saving Scheme: Should you opt for Equity Linked Savings Scheme?

Investors who are open to risk should invest in this scheme and stay invested for a long time to reap the maximum benefits.

For tax saving, there is a plethora of saving schemes to help investors, starting from fixed deposits to PPF, ELSS, and NSC, to name a few. However, among these investment options, Equity Linked Savings Scheme (ELSS) generally offers higher returns.

ELSS is an open-ended mutual fund scheme that invests a minimum of 80 per cent of its assets in equities, because of which it offers high returns. Various Asset Management Companies (AMC) in India offer ELSS funds earning high returns on investment along with added tax benefits on investments for investors. Under Section 80C of the Income Tax Act, ELSS, also known as tax-saving mutual funds, helps investors to save tax up to Rs 1.5 lakh.

This scheme offers the shortest lock-in period among tax-saving investments permitted under Section 80C, which is a mandatory lock-in period of 3 years. Experts say new investors can look into investing in ELSS funds, as they are ideal for them to start their investments in equity mutual funds with this scheme. ELSS funds usually invest in equity or stocks. Hence, they have the potential to offer higher returns than other tax-saving investment options available under Section 80C.

Also note that, to pocket-in higher returns from ELSS, investors should keep their money invested in the scheme for the long term. People investing in this scheme should come with a long-term investment horizon to benefit the most from this scheme.

Experts suggest investors looking for investment avenues that will yield them decent returns in the long run, along with offer tax-saving benefits, should invest in equity-linked savings schemes. Along with the benefit of saving on taxes, investors also get a higher return on investment as compared to bank fixed deposits, provident funds, national savings scheme, and other tax-saving investment options. Also note that ELSS is an equity investment. Hence, investors who are open to risk should invest in this scheme and stay invested for a long time to reap the maximum benefits.

Here are some features of ELSS;
1. Tax Benefit – Under Equity Linked Savings Scheme, investments up to Rs 1.5 lakh is eligible for deduction from the investor’s taxable income, given the investment remains locked in for 3 years in the scheme. Additionally, Long Term Capital Gains up to Rs 1 lakh from ELSS is exempted from tax.

2. Lock-in Period – Investors need to keep their investments locked in for the mandatory locked-in period of 3 years, to avail the tax benefit provided by ELSS. Hence, investors can invest in this scheme through Systematic Investment Plan (SIP) every month and need to complete 3 years from the date of investment to be exempted from applicable taxes.

3. High Returns – This scheme invests predominantly in market-linked instruments. Such as, ELSS invests in equities which yield high returns in the long run. Hence, when compared to other tax-savings options such as Tax-saving Fixed Deposits (FDs) and Public Provident Fund (PPF), an equity-linked savings scheme scores high in terms of return on investment.

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Source: Financial Express