6 things you wanted to know about ELSS

Smart financial planning is one of the basic principles for realising your dreams. For example, if you want to buy a house or luxury car, you need to plan for it early. So, you have to save and then invest the savings intelligently. Always remember that reducing tax liability is a saving too. Now, if you can save tax and create wealth simultaneously, wouldn’t it be icing on the cake it.

Systematic Investment Plan or SIPs are the simplest tool to save tax and create wealth in one go. All that you have to do, is to invest in Equity Linked Saving Schemes or ELSS, which are tax saving schemes of the mutual funds. You can invest in ELSS via SIPs. For ELSS investments using SIPs, the government allows you the deduction of up to Rs. 1.5 lakh from your taxable income. You save more than Rs 45,000 if you are in the 30% tax bracket.

You can start an ELSS SIP with the minimal amount of Rs 500. However, you can increase the amount whenever you want to. To start SIP you have to fill a form, offline or online. In the form you have to give your bank account details for auto-debit. You have the flexibility of choosing the frequency, i.e. weekly, monthly, quarterly, or yearly. And yes, SIP gives you the option of choosing a date too. ELSS SIPs not only save tax but offer you other advantages too. On an average you get returns of nearly 15% over 5 years. Almost more than double that you get on PPF, FD, or NSC investments. These returns help you create wealth.

With a lock-in period of just 3-years, it gives you more liquidity than PPF for example, where the lock-in is 15-years. Advantages don’t end here. Unlike insurance policies or PPF, there are no penalties for missing your installment. You can deposit after the due date and your SIP continues. However, if you miss three consecutive installments, then your SIP gets cancelled and you then have to fill a form again for restarting your SIP. So, you should maintain adequate bank balance on your SIP date.

Now, let us look at your precautions. Since you ELSS SIP investments go into equities, you must assess your risk appetite before investing in this instrument. Once into it, ensure adequate balance in your account on SIP date.

It is an investment product which encourages savings via equity. You would have heard from your CA, that invest in ELSS for saving tax. So, basically it is tax saving mutual fund product, wherein the investor gets an exposure of both; equity investments and fixed income securities in one fund thereby making it a well-diversified portfolio with good asset allocation.

Now, you might be thinking that, by investing in ELSS how could I save tax? So, under section of 80C of income tax act, we do not have to pay any tax on the amount invested in ELSS. The limit of this deduction is capped to Rs 1,50,000 pa and also there is a lock-in period of 3-years. And any ways, since investment has to be for long term, this lock-in is blessing in disguise.

Now, you might be thinking, What about the returns? Well, speaking about the returns, ELSS has given a good 12-15% return pa and considering that it also has tax deduction on the same, then why not go for it. And if we look at a different tax saving investments like PPF, NSC or FD, PPF gives a return around 7-8%, but with a lock-in period of 15-years. NSC on the other hand, gives around 6-7% with the lock-in of 6-years and FD gives a return of around 5% also has a lock-in period of 5-years.

So, here we can conclude, that ELSS is one of the best tax saving investment schemes. And if you are confused whether to invest via lumpsum or SIP, ideally this investment should happen on a monthly SIP basis for better rupee cost averaging.