Every year, taxpayers rush to find ways to reduce their tax liability. Popular options include Public Provident Fund (PPF), National Savings Certificate (NSC), and tax-saving fixed deposits. However, a modern and smarter alternative, the Equity Linked Savings Scheme (ELSS), has gained popularity for its unique advantages.
So, why should you consider ELSS over traditional tax-saving instruments? Let’s break it down.
Higher Return Potential
Traditional options like PPF and fixed deposits offer fixed and relatively low returns. For example, PPF currently gives around 7-8% annual returns, and tax-saving FDs offer 5-7%.
ELSS, on the other hand, invests mainly in equities. Historically, equities have delivered 12-15% returns over the long term. While these returns are not guaranteed, they provide an excellent opportunity to grow your wealth significantly faster than traditional products.
Shortest Lock-In Period
Most tax-saving options have long lock-in periods. PPF has a lock-in of 15 years, NSC has 5 years, and tax-saving FDs also have 5 years.
In contrast, ELSS has the shortest lock-in period of only 3 years. This offers more liquidity and flexibility if you need access to your money sooner.
Power of Compounding
Since ELSS is equity-based, it benefits strongly from the power of compounding. If you stay invested beyond the mandatory 3-year lock-in, your money has a chance to grow substantially as it earns returns on returns.
This is a huge advantage for long-term financial goals like retirement or wealth creation.
SIP Option for Disciplined Investing
Unlike most traditional options, ELSS allows you to invest through a Systematic Investment Plan (SIP). By investing small amounts regularly, you can average out market volatility and reduce the risk of investing a large lump sum at the wrong time.
Tax Efficiency
Like other Section 80C options, ELSS allows a deduction of up to ₹1.5 lakh from your taxable income, potentially saving up to ₹46,800 in taxes.
However, what makes ELSS more tax-efficient is its potential to generate higher post-tax returns despite the market risks, giving it an edge over fixed-return instruments.
Ease of Investment and Redemption
Investing in ELSS is simple and can be done online within minutes. After the 3-year lock-in, you can choose to redeem your investment or stay invested for even higher long-term growth.
This flexibility makes it appealing to both new and experienced investors.
Who Should Choose ELSS?
- Young professionals looking to grow wealth while saving tax
- Investors with a medium to high-risk appetite
- Individuals with long-term financial goals
- Anyone who wants more flexibility and better returns than traditional instruments
Conclusion
While traditional tax-saving instruments offer safety and guaranteed returns, they often fall short when it comes to wealth creation. ELSS mutual funds combine tax benefits with the power of equity growth, making them a superior choice for those who can take some risk and think long term.
If you want to make the most of your tax-saving investment, consider adding ELSS to your portfolio today.
