How much tax can you save with ELSS funds?

Under Section 80C of the Income Tax Act of 1961, you can claim maximum deductions of up to Rs. 1,50,000 if you invest in an Equity Linked Savings Scheme. Remember that this is total amount you can save under section 80C, so you have to factor in any other tax saving investments you might have. If you fall into the highest tax bracket of 30 per cent, you can save tax up to Rs. 46,800 each year if you invest Rs 1,50,000 in ELSS. This is the amount eligible for tax savings.

There is no upper limit to how much you can invest in ELSS, but anything above Rs 1.5 lakh is not eligible for tax benefits.  Despite the risk due to equity exposure, ELSS remains one of the best investment options in terms of tax benefits, higher return potential and shortest lock-in period compared to other similar tax saving schemes.

Another point to keep in mind is equity valuations tend to fluctuate in the short term, but usually deliver above average returns in the long term.

ELSS has a three-year lock in period, compared to five years for National Savings Certificate (NSC) schemes and 15 years for Public Provident Fund (PPF). The long-term capital gains on equity is exempt up to Rs 1 lakh each financial year.

Although the ELSS lock in period is three years, it is always advisable to invest for the long term in order to gain from compounding. This also helps you avoid short term volatility.

Before you invest in ELSS, however, you must have a clear idea of your financial goals and appetite for risk. It is always advisable to have a detailed discussion with your investment advisor before you invest, and finally select a fund which have a diverse portfolio of stocks. ELSS also offers you an option to invest through a Systematic Investment Plan, or SIP, with a minimum investment as low as Rs 500 in some funds. This prevents the sudden shock of a one-time large investment, but each investment will be subject to the three-year lock in from the time of investment.

In the annual budget for 2020, finance minister Nirmala Sitharaman announced that tax payers will have the option of choosing to pay a lower slab rate under new tax regime if they forego all exemptions and deductions currently available.

It is always advisable to consult your tax expert or investment advisor to understand the full financial implications of these choices before you decide to invest. However, we would recommend that even if you go for the new simplified tax slabs, you should still invest in ELSS or other equity funds in order to get returns which some other investments may not offer.

Disclaimer: The contents herein mentioned are solely for informational purpose and shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.