As compared to other havens available under Section 80C of the Income Tax Act, ELSS has the shortest lock-in period
We are well past half year in FY18-19, and this is the time to consider various tax-saving avenues available under Section 80C. You might have heard of the popular tax-saving options like Public Provident Fund (PPF), Employees Provident Fund (EPF), bank fixed deposits, Unit Linked Insurance Plans (ULIPs), National Savings Certificate (NSC) and others. Amongst all these, equity linked savings scheme (ELSS) has gained popularity owing to a range of benefits that it offers over other alternatives.
Why ELSS is better than other tax-saving options?
1. Shortest lock-in period
Lock-in period means the time for which you are not allowed to redeem your investment. It influences the liquidity of the investment avenue.
Instruments like PPF and NSC have long lock-in periods of 15 years and 5 years, respectively. As compared to other havens available under Section 80C of the Income Tax Act, ELSS has the shortest lock-in period. This makes money invested in ELSS funds much more accessible than other instruments.
Even though it has the shortest lock-in period, it is always advisable to stick around for longer duration to realise the full potential of equity investments. You may use liquid fund to withdraw money for emergency purposes.
2. Exposure to equities
Broadly, investors can be risk seekers or risk averse. The ones who want to take risk actively in their portfolio usually look for equity investments. From this standpoint, ELSS funds can add immense value to an investor’s portfolio. You might argue that even NPS and ULIPs, for that matter, invest in equities. It’s true, but NPS gives you a restricted exposure to equities. As regards ULIPs, your total exposure to equities reduces to half as part of your invested amount is diverted to provide insurance protection.
As compared to these products, ELSS remains an effective product which invests around 80-100% of your funds into equities. Thus, in addition to the inherent tax advantage, you can accumulate wealth towards achievement of long run financial goals like retirement planning.
3. Higher return on investment
Most of the investment avenues available under Section 80C require you to have a medium to long term investment horizon. It is the time period for which you stay invested in an investment vehicle. Now, going by the thumb rule, long term investments should generate higher returns to beat the inflationary pressure. But if you conduct an in-depth analysis, it’s a different story altogether. Fixed-interest generating securities like NSC and PPF yield returns in the range of 7-8%. In the same manner, Sukanya Samriddhi Yojana delivers a slightly higher interest.
As ELSS essentially invests in the equity markets, you can expect them to earn higher returns vis-a-vis other tax-saving investment options, especially from the point of view of a long-term investor. Hence, by investing in ELSS funds, you not only save tax but also make a higher gains on your investment.
4. Financial discipline
In ELSS funds, you may invest regularly by using a Systematic Investment Plan (SIP). In SIP, a fixed amount is deducted from your bank account and used to buy units of your preferred ELSS fund. The most important benefit of SIP lies in financial discipline which it inculcates in the investor. When you invest small amounts regularly on a monthly basis, it lowers the liquidity pressures which you might face at the end of the financial year. This disciplined and planned investment schedule also inspires you to get into habit of saving and investing. In this way, you approach investments keeping your financial goals in mind. You enjoy benefits of rupee cost averaging and power of compounding.
ELSS funds can help you achieve your financial goals in a planned manner. However, your success depends on prudent selection of funds and systematic investment in a committed manner.The writer is Founder & CEO of ClearTax