Equity-Linked Savings Scheme (ELSS) is one of the most popular instruments covered under Section 80C of the Income Tax Act, 1961. You can avail tax deductions of a maximum of Rs 1,50,000 a year. ELSS is the only mutual funds that offer tax deductions. As the name suggests, ELSS mutual funds majorly invest in equity instruments. Also, investing in ELSS offers the twin benefit of tax deductions and wealth accumulation. ELSS mutual funds offer the highest returns and have the shortest lock-in period among all Section 80C instruments. Such funds usually have a lock-in period of 3 years.
High returns coupled with a brief lock-in period has made ELSS the most preferred 80C investment option for taxpaying youths. You can invest in a Systematic Investment Plan (SIP) if you don’t have a lump sum to invest in one shot. Investing in SIP keeps you financially disciplined. You can invest as low as Rs 500 an instalment and you can invest more if you wish to. Investing in ELSS helps you mitigate the risk of market volatility to some extent.
ELSS investments are locked-in for a period of three years. However, you can continue investing in ELSS even after the lock-in period as they are open-ended funds. Investing with a long-term horizon helps to overcome the risk of market volatility. ELSS mutual funds invest at least 80% of their portfolio in equity instruments while the rest is invested in debt securities. You make a profit when the share markets surge, while you suffer a loss when the share markets fall. Owing to this, ELSS might seem to be risky for young investors. But, you should not be deterred by this. Investing in ELSS is worth the risk you take. If you are so worried about the market volatility, then invest in those ELSS mutual funds that majorly invest in stocks of big companies. The chances of stocks of big companies collapsing drastically are fairly low.
Apart from ELSS, no other Section 80C instrument offers inflation-beating returns. A return on investment is said to be inflation-beating if the returns earned are over and above the rate of inflation. Investing in ELSS helps you achieve various financial goals, be it a long-term goal like retirement planning, or short-term goal like going on an international trip. Remember that ELSS funds are locked-in for a time period of three years, and you cannot withdraw within three years at any cost. Hence, you must ensure to set aside sufficient funds to meet emergencies before investing in ELSS mutual funds.
Post the lock-in period of 3 years, you can withdraw your ELSS investment and post the redemption, the amount will be credited to your bank account within 3- 7 working days. ELSS withdrawals can be made in a Systematic Withdrawal Plan (SWP), allowing you to withdraw a fixed sum on a pre-determined date on a monthly, quarterly, or annual basis. Withdrawing through SWP helps in optimising capital gains tax.
Investing in ELSS is one of the best Section 80C avenues. You get tax benefits and high returns, which help you achieve various financial goals. Equity market can be volatile and investing with a long-term horizon through SIP can help in overcoming the risk of market volatility.
The author is Founder and CEO, ClearTax.com.