Don't Miss Out On Investing In ELSS

The money that you earn is put to work even before it hits your bank account. If you are a salaried employee then it is most likely that tax is deducted at source from your monthly income. If you have other sources of income, then you inevitably add up all these when filing your income tax returns and pay any taxes that might be due. 

While the payment of taxes is not optional, you can reduce your total tax outgo through judicious tax planning. It is important to note that tax planning is an integral part of your financial plan and hence, should be done effectively. As per the Income Tax Act, 1961, you can save tax by investing in certain tax-saving instruments. What it does is that subject to a certain limit, the amount invested in these instruments can be deducted from your total income while calculating the tax liability. By reducing the overall taxable income, these investments can help reduce your tax outgo. Additionally, there are certain investments like Equity Linked Savings Scheme (ELSS) that offer the opportunity to generate returns. 

What is ELSS? 

An ELSS is an equity mutual fund that provides a tax exemption of up to Rs 1,50,000 under section 80C of the Income Tax Act. ELSS mutual funds can offer you the dual advantage of tax saving and potential return generation. These funds invest a majority of money in equity and equity-linked instruments that can potentially generate long-term returns for you and help you achieve your financial goals. Your investment in an ELSS mutual fund is subject to a lock-in period of three years and the returns generated from this investment are subject to long-term capital gains tax. There are several key advantages of ELSS that make it an investment that you should not miss.

Advantages of investing in an ELSS Mutual Fund

Reduce your tax outgo: The investment that you make in an ELSS mutual fund is allowed for deduction under section 80C of the Income Tax Act, 1956. The cumulative limit for deduction under this section is Rs 1,50,000. This means that the maximum deduction that you can claim by investing in an ELSS mutual fund is Rs 1,50,000.

Potential Growth: ELSS mutual funds invest a major proportion of the money received in equity and equity-related instruments. Equities are considered as vehicles of growth and can potentially generate high returns over the long-term. By investing in an ELSS, you have the opportunity to create long-term wealth. 

Minimal lock-in period: All tax-saving investments tend to come with a lock-in period which imposes a limit on withdrawals. ELSS investments have a lock-in period of three years which is the lowest amongst all tax-saving options. Having said that, in order to reap the benefits of equities, it is better to stay invested for the long-term (more than five years).

Diversification: ELSS mutual funds being largely multi-cap in nature invest across market capitalizations and sectors. Further, some of the funds may tend to invest a small portion of the fund in debt instruments. This provides you with diversification within equities and the downside protection of debt investments. Such diversification aids in reducing the overall portfolio risk.

Professional Management: ELSS mutual funds are managed by professional fund managers who are experts in the field of investment management. The investment decisions that they make are based on in-depth research and take into consideration the risk-return potential of each investment option. This enables them to generate returns while mitigating overall portfolio risk. 

To conclude, ELSS mutual funds pack a punch by maximising the gains that can accrue from saving taxes and generate long-term returns. Keeping these advantages in mind, it can be said that one should not miss out on investing in ELSS mutual funds as they are clearly one of the best tax-saving options available in the market.  

The author is the owner of Vikalpa Finvest

DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.