4 Reasons Why You Should Invest In ELSS Funds

   

Here are the 4 reasons why you should invest in ELSS funds.

Number 1: You can save tax and create wealth at the same time

First of all, ELSS funds are equity mutual funds. They are essentially multi-cap funds, i.e. they invest in companies of all sizes – large, mid and small – across all sectors. And being an equity mutual fund, it has the potential to create wealth over the long term through equities. 

But, the other big benefit you get for investing in ELSS funds is the fact that you can claim up to Rs 1.5 lakh tax deduction under Section 80C. No other mutual fund provides you this benefit.  So, if you are in the highest income tax bracket of 30%, you can save Rs 46,800, including 4% cess in income tax.

So you can simply say, investing in ELSS gives you the opportunity to create wealth over time like all other equity mutual funds. Plus, you get tax benefits for investing in ELSS that no other mutual fund gives you. 

Number 2: They have a shorter lock-in period as compared to other tax-saving investments

If you compare the lock-in period for ELSS with other tax saving investment options, then ELSS scores an extra point. 

The lock-in period for some of the popular tax-saving investment products are – PPF- 15 years, ULIP – 5 years, tax-saving FDs – 5 years, NSC – 5 years or 10 years. But compared to that, the lock-in period for ELSS is only 3 years. 

Lock-in period for tax-saving investments
Investment Option	Lock-in period
ELSS	3 years
PPF	15 years
Tax-saving FD	5 years
NSC	5 years and 10 years
ULIP	5 years

Number 3: You can start by investing small through SIPs

Like all other mutual funds, it is easy to invest in ELSS through an SIP. You can start an SIP for an ELSS mutual fund for as low as Rs 500. And like other mutual funds, as and when your income increases you can increase your investment amount through SIP top-up. 

And if you want to get the full tax deduction for investing in these funds, you have the convenience of investing Rs 12,500 every month instead of putting Rs 1.5 lakh in one go. 

Most other tax-saving investment products do not provide a systematic way of investing money on a monthly basis. 

Number 4: Mutual funds taxation help you save more

ELSS funds have a minimum lock-in period for three years. And after three years, the long term capital gains (LTCG) of up to Rs 1 lakh a year from ELSS mutual funds are exempt from income tax. However, the LTCG above Rs 1 lakh is taxed at 10%. 

Now, in terms of the taxation policy, if you compare ELSS with PPF (which fall under Exempt Exempt Exempt and hence, the maturity amount is not taxed) you might feel that the benefit for investing in ELSS is less. However, a point that needs to be mentioned here is that PPF has a very long-term lock-in period, and such investments are not fit for fulfilling short-term or mid-term goals.

So, if you compare it with a 5-year FD, then investing in ELSS is much more beneficial in terms of their taxation policy. The returns from FDs are taxed as per one’s tax bracket. And if you fall under the 30% tax bracket, then your FD returns will be taxed at 30%.

Meanwhile, for ELSS or any other mutual funds, the LTCG above Rs 1 lakh is taxed at 10%. That is, your returns are taxed at 10%.