Tax-saving for FY 2024-25: Should you invest in ELSS amid the market correction?

If you haven't made your tax-saving investments under section 80C for the financial year 2024-25, the recent market correction might be a good opportunity to invest in ELSS funds.

In the one-month period between December 13, 2024, and January 13, 2025, the BSE Sensex corrected by nearly 7%, while the NIFTY50 dropped by approximately 6.8%. Taxpayers opting for the old tax regime can make the most of the recent corrections in equity markets by investing in the Equity-Linked Savings Scheme (ELSS) offered by mutual fund asset management companies (AMCs). Here are the top reasons why:

Funds available at lower NAV

ELSS funds mostly invest in large-cap funds. With the recent sharp corrections in large-cap indices, the respective Net Asset Values (NAV) of ELSS funds have decreased.

The following table shows how the NAVs of 10 ELSS funds having NAV of over ₹8000 crore declined from December 13, 2024, to January 13, 2025.

Source: AMFI, data accessed on January 15, 2025; Upstox research

Shortest lock-in

Among all tax-saving investment options, ELSS funds have the shortest lock-in period of just three years.

Regulated by SEBI

As these funds are regulated by the Securities and Exchange Board of India (SEBI), they offer better transparency and flexibility to investors. Moreover, these days investors also have the option to invest in passive ELSS funds, apart from the active ones, that come with very low administrative charges.

Tax benefit on investment and redemption

By investing in ELSS funds, you can not only claim a deduction under section 80C for the invested amount but also get some tax relief at the time of redemption.

Additionally, long-term capital gains over ₹1.25 lakh will be taxed at 12.5%, which is much lower than the slab-based taxation of tax-saver fixed deposits. Short-term capital gains do not apply to ELSS funds due to the 3-year lock-in rule.

Points to note before investing

While ELSS funds have several features that make them the preferred choice for tax-saving, please note that this benefit is not allowed under the new tax regime.

Moreover, you need to be cautious while selecting an ELSS fund as not all of them come with the same amount of risk. There are a few ELSS schemes that have been investing higher amounts in mid-cap and small-cap stocks, which are riskier than larger caps. That said, most ELSS schemes invest a majority of their corpus in large-cap stocks.

Additionally, stock markets are expected to remain volatile in the short term. Therefore, investors should consult with a SEBI-approved financial advisor to find the right ELSS fund. Also, if your risk appetite is low, you may explore investing in safer tax-saving options like the Public Provident Fund (PPF) or tax-saving fixed deposits.

Remember, the last date to make tax-saving investments for FY 2024-25 is March 31, 2025. So investors should plan their investments accordingly.