Are there any benefits that you can enjoy on an ELSS investment beyond the Section 80C limit? Read on to know the pros and cons of such an investment beyond this tax limit.
Before understanding the tax implications of an investment in an Equity Linked Savings Scheme, its benefits and the amount that you can ideally invest towards it, let’s understand ELSS better.
ELSS is classified under the long term equity mutual fund investment with a minimum lock-in term of 3 years. It is an effective investment instrument for seasoned investors as well as beginners, offering the flexibility of starting with an investment as small as Rs. 500. It offers the EET (Exempt-Exempt-Tax) benefit that makes it an effective investment option for investors looking for long term wealth creation. A feature that makes ELSS score over other long term investments like Unit Linked Investment Plan (ULIP) and National Pension Scheme (NPS) is that it generates high returns even during unpredictable capital market conditions.
Benefits of investing in ELSS Mutual Funds
Let’s discuss the benefits of ELSS investments below:
Offers tax benefits
ELSS mutual fund is a tax saving investment that enables investors to avail tax deductions of a maximum of Rs. 1.5 lakh annually as per Section 80C of the Income Tax Act, 1961. Investors whose annual income is taxable under the top income tax slab of 30% are also eligible for tax deductions under this section. Not only do the returns from ELSS enjoy tax benefits, the withdrawal amount is also tax-free up to Rs. 1 lakh.
Every long term investment has a lock-in tenure. For instance, ULIP, Public Provident Fund (PPF), National Pension Scheme (NPS) has a lock-in of 5 years, 15 years, and till retirement respectively. What differentiates ELSS from these investment instruments is that it has a lock-in of 3 years only. While the lock-in ensures stability in your investment portfolio and aim at generating healthy returns, the lower-than-usual lock-in also ensures greater liquidity.
Achieve long term capital growth
Not just tax benefits, the lock-in feature also enable you to enjoy long term capital gains. Equity Linked Savings Scheme, as evident from the name, invests your capital in equity, an investment that is susceptible to market risks. But, at the same time, such investments also increase your chances of achieving higher returns. However, it equalizes the market risks by generating a high capital growth due to the power of compounding and the rupee cost averaging of your investments. No wonder, ELSS is known as being the most effective tax-saving investment instrument that also offers the highest returns.
Savings + wealth creation
ELSS serves the dual purpose of saving and capital growth. While savings account for 8% of the returns, equity investments can achieve higher returns in stable market conditions. ELSS is often recommended as being an effective investment instrument as it is known for generating high dividends in rising economies like India.
Encourages financial discipline
A small and sustained effort goes a long way in financially securing your future. A contribution of a certain amount from your income every month will create a robust corpus over a long term. This will help you tide over unforeseen emergencies if need be, and enable you to fulfil your aspirations. A disciplined savings habit through a monthly contribution towards a Systematic Investment Plan (SIP), emphasizes on the savings cum investment benefit that ELSS guarantees.
Should you invest more than Rs. 1.5 lakh towards ELSS?
The above discussion makes it apparent that any ELSS investment exceeding Rs. 1.5 lakh will not be eligible for tax deductions under Section 80C of the Income Tax Act, 1961. Now, the question is – Should you invest an amount beyond Rs. 1.5 lakh even though you would not be able to enjoy tax benefits? More so, because you won’t be able to avail special tax benefits for staying invested in ELSS throughout its lock-in period of 3 years.
It would be a wiser decision to invest any amount over Rs. 1.5 lakh in an investment instrument, for instance, a diversified equity mutual fund. Such a fund generates high returns over a long term, and that too, without having a lock-in. That way, you would have the flexibility to switch between funds as per your financial objectives, risk appetite and market conditions, and also achieve a comparatively higher growth than ELSS through a disciplined savings approach.
In a nutshell
Investments in ELSS and diversified equity mutual funds offer similar benefits, except the tax benefit that is unique to the former. This benefit too is not applicable on ELSS investments over Rs. 1.5 lakh. Hence, it does not add any savings or investment value. In contrast, diversified equity mutual funds would offer the same benefits and also avoid liquidity risks. Therefore, if you have an amount over Rs. 1.5 lakh that you want to invest, a diversified mutual fund would be a better long term investment instrument.
Recommended Read: Types of ULIPs and Their Tax Benefits