Is ELSS a good option for tax relaxation?

ELSS (equity linked saving scheme) is a valuable financial investment that provides considerable tax relaxation features and benefits. In comparison to other tax-saving instruments such as five-year fixed deposit (FD), public provident fund (PPF), national pension scheme (NPS), voluntary provident fund (VPF), etc, ELSS fund stands out as a prudent choice for retail investors looking to save taxes while aiming for potentially higher returns on their investments.

Here are some key reasons why ELSS is considered a prudent choice for tax relaxation in comparison to other 80C options –

Tax savings under section 80C

ELSS investment allows tax deduction as per Section 80 C. This infers that the fund invested in the ELSS option qualifies for tax exemption of up to Rs 1.50 lakh. By investing in ELSS, investors can effectively lower their taxable income and save on taxes. This tax-saving benefit makes ELSS an enticing choice for investors seeking to optimise their tax strategy while generating potential wealth.

Potential for earning higher returns

As ELSS majorly invests in equity and equity-linked instruments, this offers investors the opportunity to take part in the growth potential of the stock market. Note that over the long time period, equities have the potential to generate higher returns than conventional tax-saving investments such as PPF or five-year FDs. By investing in the preferred ELSS scheme, investors can potentially generate higher returns and grow their investments over time.

Dividend income potential

ELSS distribute their dividends to their retail investors, offering regular income to them during their investment horizon. Such dividends can either be reinvested or used according to the preference of the investor. This feature can be advantageous, especially for investors seeking constant income along with the benefit of tax savings.

Shorter lock-in period

ELSS comparatively have a shorter lock-in of only three years, which is considerably lower as compared to other 80 C investment options such as PPF, national savings certificate (NSC), tax-saver FDs, etc., which often come with lock-in periods spanning between five and fifteen years. In the case of NPS, the lock-in is until the age of retirement. ELSS offers the shortest lock-in, which provides retail investors with high liquidity and flexibility features, permitting them to access their investments relatively quickly on the occasion of any monetary mismatches or financial emergencies.

Systematic investment plans (SIPs)

ELSS permits retail investors to take benefit of SIPs, where they can invest a systematically fixed amount over a specified time period. Such a disciplined approach not just instils saving habits but even permits investors to gain the benefit of compounding effect and rupee cost averaging. Owing to the cost-averaging feature, retail investors can buy more units during bearish market phases and fewer units during bullish markets, potentially lowering the effect of market volatility

Ending note

ELSS is a suitable tax-saving option for retail investors. Its shorter lock-in periods, the potential for generating higher returns, the possibility of providing dividend income, and allowance to opt for the SIP mode, make it a suitable choice over other 80 C investment avenues. By opting for ELSS, retail investors can save tax of up to Rs 1.50 lakh and potentially attain higher returns than fixed-income avenues. However, before beginning an ELSS investment, it is necessary to factor in one’s risk tolerance level as well as perform in-depth research for a well-informed decision.