ELSS-an ideal investment for tax saving

Lowest lock-in of only 3 years

Highest return earning potential of 15-20 percent (completely tax-free!)

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When you spend or invest money in certain ways, the Government allows you to deduct the spent amount from your annual income before tax is calculated.

If you have an ongoing home loan, or have children whose tuition fees you are paying, or have medical bills, you can deduct it from your annual income before tax calculation. Likewise for investing in PPF, tax saving FD, and ELSS.

There are several tax saving options that are beyond the ones mentioned above.

What are ELSS Funds?

ELSS (Equity Linked Savings Scheme) are mutual funds that provide you tax benefits. They invest in the equity markets. Their returns are linked to market performance.

 As with any mutual fund, they collect a large pool of investor’s money and then invest them in stocks and equity related instruments.

 ELSS funds can be likened to multi-cap funds. Similar to multi-cap funds, they invest in companies of all market capitalizations.

 This allows ELSS funds to be very dynamic when investing. They can majorly invest in smaller companies when growth rates are aggressive and stick to large-cap funds in more turbulent times. This flexibility isn’t available to funds that are restricted to investing only in companies of a certain market capitalization.

Why is ELSS a good option?

In case of all other tax saving options, there is a lock-in period of at least 5 years. In case of ELSS, this lock-in period is only of 3 years.

It has been historically observed that ELSS funds give much higher returns than other investment options. While an FD (lock in 5 years) will give you around 6.5 percent per annum and PPF (lock in 15 years) will give you 7.6 percent per annum, ELSS funds have given nearly 3 times that in the past.

For instance, look at Aditya Birla Tax Relief 96. This fund was launched in 1996 and has given a return of 26 percent per annum since. There are many other top rated ELSS funds you can invest in too.

All the tax saving options mentioned so far give you tax benefits under Section 80C.

How Much Should I Invest in ELSS?

Under Section 80C, you can avail a maximum benefit of Rs 1,50,000.

First, you need to add up all your unavoidable expenses for which you can get benefits under Section 80C. This includes children’s tuition fee, medical expenses, and so on. Other unavoidable investments like EPF is also to be added to this.

Let’s say this comes up to a total of Rs 45,000 per annum.Deduct all of these expenses from Rs 1,50,000.

In the above example, you will now be left Rs 1,05,000 for which you can take benefit.

So, to take full benefit of Section 80C, you can invest Rs 1,05,000 in one of more ELSS funds.

The amount you can save actually depends on your tax bracket.

Refer to the following table to understand this better.

 The concept of best mutual fund does not exist because it’s not possible to predict the performance of any fund. The ideal way is to select the top 3 good mutual funds based on past 3 years and 5 years performance and split your investment in these funds. Ideal way is through SIP (systematic investment plan), but for this year, as the deadline is near, one can do a lump sum also.

Should I invest more even if I don’t want tax benefits?

With returns this high, it is natural to want to invest more. However, that is not required.

If you want similar returns, you should look to invest in multi-cap mutual funds. Their investment pattern and returns are very similar to ELSS funds.

The only difference is that they do not have any lock-in period - which makes them ideal if returns is all you want.

If your money is going to get locked up for tax saving, you might as well make the most of it being locked. By investing in ELSS funds, you are able to get returns that are comparable to the best performing mutual funds too.

Author is Co-founder & COO, Groww

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.