When it comes to tax-saving options, most people think of fixed deposits, PPF, or insurance. But if you want to save tax and also grow your wealth, Equity Linked Savings Scheme (ELSS) mutual funds are one of the best choices available.
ELSS offers you tax benefits under Section 80C of the Income Tax Act while giving you an opportunity to earn higher returns compared to traditional options. Let’s understand why ELSS mutual funds deserve a place in your tax-saving and investment plan.
What is an ELSS Mutual Fund?
ELSS is a type of equity mutual fund where a majority of the corpus is invested in equities and equity-related instruments. These funds come with a mandatory lock-in period of 3 years, the shortest among all tax-saving instruments under Section 80C.
Tax Benefits Under Section 80C
The biggest attraction of ELSS funds is the tax deduction they offer. You can claim a deduction of up to ₹1.5 lakh in a financial year, which can reduce your taxable income significantly.
For example, if you are in the 30% tax bracket and you invest ₹1.5 lakh in an ELSS, you can save up to ₹46,800 in taxes.
Higher Returns Compared to Traditional Options
Unlike fixed deposits or PPF, ELSS funds invest mainly in equities. Historically, equity investments have delivered higher returns over the long term. While they do come with market risks, the potential for wealth creation is much higher.
Shortest Lock-In Period
ELSS funds have a lock-in of only 3 years, which is much lower than PPF (15 years) or tax-saving fixed deposits (5 years). This provides more liquidity and flexibility if you need funds after the lock-in.
Power of SIP in ELSS
You can invest in ELSS through a Systematic Investment Plan (SIP), which allows you to spread your investments over the year. This reduces the risk of market timing and helps build a disciplined investment habit.
Long-Term Wealth Creation
Besides tax saving, ELSS also focuses on wealth generation. Staying invested even beyond the lock-in period can help you benefit from compounding and equity market growth, making it a strong tool for achieving long-term goals like retirement or children’s education.
Things to Keep in Mind
- Market Risk: As an equity product, ELSS is subject to market fluctuations. It is important to have a long-term view.
- Fund Selection: Choose a fund with a strong track record, good fund management, and consistent performance.
- Stay Invested: Consider holding beyond 3 years to maximize returns.
Conclusion
ELSS mutual funds provide a unique combination of tax benefits and wealth creation potential. By investing wisely and staying patient, you can reduce your tax burden and simultaneously work towards your financial dreams.
If you are looking for a smart, efficient, and growth-oriented tax-saving option, ELSS should be at the top of your list.
