ELSS stands for Equity Linked Saving Scheme. The ELSS is provided by the Mutual Fund of India. These are tax benefit schemes under section 80C of the Income Tax Act 1961.The minimum maturity period or lock in period is three years. The minimum investment is Rs 500. Although there is no upper limit on the maximum investment, tax is exempted only upto 1.5 lakhs per year.
There are two option for investing into ELSS, they are, the Systematic Investment Plan (SIP) and the Lum Sum Investment Plan. The Systematic investment plan is more recommended by experts because it maintains an average and does lead much loss with market variation.
Risk Involved in ELSS
Unlike other government backed tax saving schemes the ELSS depends on market variations and any gain or loss depends upon the companies where the investment is made. Even though it is risky it also yields good returns.It is for this reason that experts advise on investing into mutual funds because it bears advantages that no other investment schemes provide.
Advantages of ELSS
Besides saving tax, mutual funds comes with a number of other advantages like:
High return: Equity has the capacity to yield higher returns. Most of the time I the long-term equity outperforms long term tax saving schemes when invested for a period of 5 to 10 years. While the returns on fixed tax saving schemes like PPF or fixed deposit goes upto 8%, the returns of investment on ELSS goes upto 15% within 10-year period
Opportunities: Sometimes when the economy is going through a downfall, in such a time even good companies sell their stock at a very low price. This can turn out to be a great investment of the ELSS funds as this would mean buying the good stocks at a cheap price which will in turn will yield good returns when the economy pulls up. Thus, it is always recommended to invest in ELSS when the economy is going through a bad phase
More choices and options: Firstly, the minimum term period of ELSS is 3 years. Thus, unlike fixed saving investments a person does not need to wait for many years for its maturity. Further it is not mandatory to invest in ELSS every year. If a particular fund is giving good returns then investment to such a fund can be stopped any time. Moreover, a person can also have a variety of funds. Thus, if one fund is not doing well he or she can anytime shift to another fund.
It is tax free!!: Not only are the investment tax free upto 1.5 lakhs per annum, the returns on the investment are also tax free upto one year. By the time the lock in period ends the returns also becomes tax free. The tax deduction on investment is based on the guidelines of the section 80C of the Income Tax Act 1961.
ELSS And Other Saving Schemes and Deposits
ELSS and PPF: Even though the PPF is backed by the government and does not involve much risk, it must also be kept in mind before making an investment to any tax saving scheme that ELSS comes with greater return than PPF.
On one hand, the rate of interest on PPF deposit is 7.9% while on the other hand the rate of interest on ELSS depends on market variations and goes as high as 12% to 15%. Further the lock in period of PPF is 15 years. Prior to completion of its term period only partial withdrawal is allowed on special occasions. The minimum term period of ELSS is 3 years.
Moreover with PPF account, a person is required to deposit a minimum of Rs 500 per year. In case of ELSS a person can stop investing if he or she finds that investing on a particular fund is not yielding proper returns. A person can invest a maximum of 1.5 lakhs per year in a PPF account. There is no upper limit on the maximum amount of investment when it comes to ELSS. Although it must be mentioned that in case of ELSS the tax exempted maximum amount is Rs 1.5 lakhs as per the guidelines provided in section 80C in the Income Tax Act of 1961
ELSS and fixed deposit: An ELSS is an investment made on equity. A fixed deposit is simple deposit with a lock in period. It can be opened in any bank in India. While the interest rate on ELSS depends on market variables, the average rate of interest varies between 12% to 15%. On the other hand, the interest rate of fixed deposit varies between 6.5% to 7.5%.
The minimum lock in period in case of ELSS is 3 years and in case of fixed deposit the minimum lock in period is 5 years and maximum of 10 years. Further, when it comes to ELSS, withdrawal claims can be made any time after the completion of 3 years. However, in case of fixed deposit a person cannot claim for withdrawal before the completion of 5 years.
ELSS and recurring deposits: Investing in recurring deposit does not involve any risk but at the same time the rate of return is also less compared to ELSS. The rate of interest on recurring deposit varies from one bank to another and is usually between 5% to 7%. On the other hand, ELSS involves a risk factor but again its interest rate is higher than any other saving schemes.
ELSS and NSC: In case a person is searching for a safe return then he or she should invest on NSC rather than on mutual fund but if a person focuses on returns then he or she should definitely invest on ELSS. Further, both NSC and ELSS differs in terms of lock in period. The lock in period of NSC is 6 years and the lock in period on ELSS is 3 years
Thus, it can be concluded that although it comes with risk, ELSS gives better return than any other saving schemes in India. With high returns it gives the tax payer additional advantage of a short lock-in period.
The superiority of ELSS with regards to other saving schemes in terms of returns can be explained with the following table:
|INVESTMENT||TERM PERIOD||RETURNS||TAX ON RETURNS|
|ELSS||3 YEARS||14-16%||NO TAX|
|PPF||15 YEARS||7.9%-8.5%||NO TAX|
|NSC||5 OR 10 YEARS||8.5%||INTEREST IS TAXABLE|
|FD||5 YEARS||9.5%||INTERST IS TAXABLE|
|LIFE INSURANCE||5 YEARS||0-6%||NO TAX|
Thus, it can be concluded after going through the advantages and the disadvantages of ELSS that ELSS comes with risk and due to market downfall, a person might not earn any gain. However, this does not mean that a person will be exempted from any benefit because even though a person does not get any return, it must be kept in mind that the amount invested is always tax exempted.
To know more about Tax Saving Investment Options available to you please check out An Overview of Tax Saving Investment Schemes