What is Equity Linked Saving Scheme (ELSS)?

ELSS is a great way to save tax, boost your portfolio, and invest for the longer term.

January is a month of New Year resolutions – more exercise, better relationships, vacations and sunsets and pledges to reduce spending. For the salaried, January is also synonymous with submission of investment proofs for tax saving to their companies, a process generally accompanied by the realization that the Rs. 1 lakh has not yet been put aside as required, followed by a frenzied anxiety to arrange for the elusive amount to decrease one’s tax liability.

With investors seeking tax saving investments, the national saving certificate, tax saving bank deposits, regular investments in a public provident fund or buying insurance policies are commonly advised as investment avenues. However, one of the best investment options in the tax saving category is often overlooked – Equity Linked Savings Scheme (ELSS).

What is an ELSS?

An ELSS is similar to a diversified equity-oriented scheme, with the additional benefit of saving tax under section 80C.  Structured as an open-ended equity fund with a lock in period of three years, an investor can invest at any time during the year.

The maximum investment in ELSS that can avail of a benefit under section 80C is Rs. 1 lakh. Accordingly, the maximum tax that one can save through these schemes is Rs. 33,990.

Advantages

The three-year lock-in period works in favour of the investor as ELSS tend to have a more stable corpus. This means lower volatility for the ELSS as compared to a diversified equity fund. Depending upon their style of management, fund managers would be able to take long term investment calls without worrying about redemption pressures and can opt to remain fully invested.

* Compounded annually

** Compounded half yearly.

# Taxable but accrued interest available for 80C benefits until 5 years

Compared to all other tax planning schemes available today, ELSS has the shortest lock-in period. It also has the potential to give you superior returns over other tax saving instruments.

Suitable for long term goal planning

Though lump sum investments can be made, one can invest through the SIP route as well. Investments of as low as Rs. 500 per month are also possible. As equities are market-linked, investors have the opportunity to benefit from rupee cost-averaging. This, in turn, allows them to lower the average cost of purchase significantly and eventually enables them to reap benefits over the medium to long term.

In conclusion, if you’d like to save tax while giving your portfolio an extra edge while investing for the longer term, ELSS schemes are the way to go for you!

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