Tax-efficient growth via equity linked savings schemes (ELSS)

Benefits of ELSS

ELSS offers many benefits, making it a popular alternative for tax-efficient investments. Let's look at how ELSS is more valuable than other savings schemes.

• Shortest lock-in period

The ELSS has the shortest lock-in period of only three years, which is much shorter than other tax-saving devices. Traditional tax-saving choices, such as the Public Provident Fund (PPF), have a lock-in time of 15 years, whilst tax-saving fixed deposits (FDs) have a lock-in period of 5 years. The shorter lock-in time gives you greater liquidity and freedom.

• Equity-based

ELSS has the potential to generate much greater long-term returns than most other tax-saving investment strategies. When compared to fixed-income schemes such as PPF, National Savings Certificate (NSC), and tax-saving fixed deposits, ELSS allows for market-linked returns through investing in stocks.

• Post-tax returns

Capital gains from ELSS are taxed efficient. Long-term capital gains (LTCG) from ELSS mutual funds are taxed at a 10% rate if the total gain exceeds ₹1 lakh per year.

• Easier to invest

ELSS is a simple investing option, especially if you don't have a large lumpsum to invest. You can invest a certain amount every month using systematic investment plans (SIPs). This can develop the habit of regular savings while also giving a systematic approach to wealth accumulation. As a result, this kind of investment is more adaptable than other classic tax-saving vehicles like fixed deposits or PPF, which often demand lump-sum deposits.

• Potential to beat inflation

ELSS invests largely in equities, which have the ability to outperform inflation and generate wealth over time. Fixed-income schemes and other classic tax-saving tools, on the other hand, may provide lower returns due to fixed interest rates, perhaps resulting in returns that fall behind inflation.

How to invest in ELSS?

Growth option ELSS amplifies your growth potential to the highest due to compounding. And, higher the Net Annual Value (NAV) goes, your returns keep multiplying. Dividend option ELSS on the other hand gives returns from time to time, which is a huge benefit as well. The dividends that you receive from the ELSS are taxable as per tax slab. But, if the dividends are more than ₹5000, they are subject to 10% Tax Deducted at Source (TDS).

Dividend reinvestment option is where your accrued dividend is reinvested, which means it is added to your NAV. When you get to increase your returns, when the market booms.

Conclusion

So, if you are someone with a knack for investing in equities, but do not wish to get greater risk for the same and want eligible deductions, ELSS is the key to your door.