Tax Planning

Saving taxes at times may come across like routine assignment that one has to complete and have it out of the way. No matter how much one may read up through the year, the final investments will undoubtedly be made in the last three months before the 31st March deadline.

When you are under pressure to save the maximum amount and not sure of pros & cons of various options you may end up saving in sub optimal instruments that may give you the 'Tax' rebate but can fall well short in performance. The danger is that this excercise can continue year after year and can result in hard earned money going after instruments with mediocre performance that may not even beat inflation over the long-term.

Why ELSS funds are better than other tax-saving investments

ELSS mutual fund is popular among the tax-savers because it provides the twin benefit of capital-appreciation & tax rebate.  ELSS funds are equity linked savings schemes that can get you a tax break of up to ₹1.5 lakh under Section 80C of the Income Tax Act. These are tax-saving mutual funds that invest primarily in equities. While ELSS funds are not the only tax-saving investment option available, they trump other options like Public Provident Fund (PPF), National Pension System (NPS) and Tax-saving Fixed Deposits (FD).

Depending on the income tax bracket applicable to you, an investment of INR 1.5 lakhs in an ELSS can save you a maximum of INR 46, 350 in taxes if you are in the 30% bracket.


Here are 3 primary reasons why ELSS funds are better than other tax-saving investments.

Higher returns over the long-term

Since ELSS funds invest in stocks and can have the highest equity allocation among tax-saving investments, they are best placed to earn inflation-beating returns. Over many years, the rate of inflation can eat up the returns that traditional debt-oriented investments earn. Equity is an asset class that holds the capacity to beat inflation. This is how ELSS funds can give you the best of both worlds–high returns and tax saving.

Lowest lock-in period

While traditional tax-saving investments have long lock-in periods, ELSS funds come with a lock-in of only 3 years. In comparison, PPF has a lock-in of 15 years and NPS requires you to stay invested till you retire. The 3-year lock-in of ELSS funds is a major advantage here. Your money doesn’t get blocked for long periods and you enjoy the ability to even stop investing if you don’t need to invest or if a fund is not doing well enough.

Highest amount of flexibility

ELSS funds allow the highest flexibility among all tax-saving investments. In traditional investment avenues, you have to stay invested in one type of option only. But with ELSS funds, you can diversify across various mutual funds and benefit from their unique investment styles. You may also stay invested in an ELSS fund after the lock-in period expires if you think it is performing well. These tax-saving mutual funds don’t have a maturity date. You can even stop investing in an ELSS fund; there is no compulsion to stay invested for any amount of time.

Best for beginners

The ELSS mutual fund scheme allows you to invest through SIP (Systematic Investment Plan). This means that you don’t have to worry at the end of the year to have a lump sum amount to put in the scheme. So you can add little by little to your ELSS mutual fund and let it grow for you.
 

On an overall basis, this is how ELSS funds stand in comparison to other tax-saving investments.

Investment Interest or returns Lock-in Period Risk Profile
ELSS funds 12% to 15% (expected) 3 years Market-related risks
PPF 8.1% (guaranteed) 15 years Risk-free
NPS 8% to 10% (expected) Till retirement Market-related risks
FD 7% to 9% (guaranteed) 5 years Low-Risk
NSC 8.1% (guaranteed) 5 years Risk-free
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