Compared to other investment instruments accessible under Section 80C of the Income Tax Act, ELSS funds are an effective way to save tax. ELSS has the advantage of a shorter lock-in period and wealth accumulation professional fund management. Learn more about the ELSS Funds other elements in this article.
Get to know equity-linked savings scheme
For a clear understanding of what an equity-linked savings scheme (ELSS) is, we need to find out why it is a better investment than other 80C investments. These are funds managed by skilled finance experts and are provided by various fund houses. It means that fund executives handle your investments and profits with tax savings.
ELSS is a type of tax benefit investment under Section 80C of the Income Tax Act where investments of up to Rs 1.5 lakh can be made in a financial year. You are free to invest more than this amount, but a surplus of more than Rs 1.5 lakh will not allow you to avail of the tax benefits of Section 80C.
ELSS returns are taxable on dividend distribution tax (DDT) and long-term capital gains (LTCG) taxes. Despite the change, among all other 80C investments, ELSS dominates as the preferred option.
It is possible to classify ELSS funds into
- Growth funds
- Dividends funds
Growth funds- A growth fund is a long-term platform for investors in which funds are created, where the total value of the fund is realized at the time of redemption.
Dividends funds: There are two sub-categories of dividend payment –
- Dividend payment and
- Dividend reinvestment
Will earn a tax-free dividend under the dividend payment option. In the case of dividend reinvestment, your dividend will be renewed as a new investment.
Why is ELSS better than any other 80C investment?
Despite the taxation of the new tax scheme i.e., ELSS Long-Term Capital Gains, these funds still hold their place as one of the best tax-saving options from the perspective of experts. ELSS has an essential role in your portfolio. These net equity-based instruments carry the potential for high yields and are an optimal long-term investment option. ELSS retains its ground even after having tax returns compared to other 80C investment options like Public Provident Fund (PPF) and ULIP.
Given ELSS investments in equity markets, yields are much higher than most investment options with long-term tax-saving benefits. It serves two purposes;
- Not only saving your taxes, but also
- Generating higher returns/profits.
For a person willing to invest for the medium term, ELSS may be the right option.
Empirical evidence suggests that over ten years and above, ELSS produces about 12% more. It is a substantial gain relative to the 8 percent yield of PPF. Even NSC returns and life insurance schemes declined slightly.
A shorter lock-in period
The ELSS has a shorter lock-in period. Unlike the Public Provident Fund, the National Savings Certificate and the Provident Fund for Employees, all of which require a lock-in period of at least five years, ELSS is a better bet with a commitment of only three years.
Note: Before investing your money, it is essential to consider all the elements of funds as well as your investment goal. Consult a financial specialist for a sample of the top funds raised by high-risk to medium- and low-risk financial experts. There is something in every risk profile, and you can choose what meets your financial needs.