Why Should You Invest in ELSS Tax Saving Mutual Funds?
1. Saves Taxes and Builds Wealth: To begin with, ELSS funds are mutual funds that invest in equity. They are basically multi-cap funds, which make investments in businesses of all sizes, large, mid, and small, and across all industries. And, as an equities mutual fund, it possesses the ability to generate long-term wealth through shares. However, another significant advantage of putting money into ELSS funds is the fact that you are eligible for a tax deduction of up to ₹1.5 lakh under Section 80C. This advantage is not available from any other mutual fund. So, if you are in the 30% tax bracket, you can save ₹46,800, including the 4% cess in income tax. Simply put, investing in ELSS, like any other equity mutual funds, allows you to build wealth over time. Furthermore, investment in ELSS provides tax advantages that no other mutual fund provides.
2. Shorter Lock in Period: When the lock-in period for ELSS is compared to other tax-advantaged investment choices, ELSS earns an extra point. The lock-in term for various popular tax-saving investment options is 15 years for PPF, 5 years for ULIP, 5 years for tax-saving FDs, and 5 years or 10 years for NSC. In comparison, the lock-in time for ELSS is only three years.
| Investment Option | Lock-in period |
|---|---|
| ELSS | 3 years |
| PPF | 15 years |
| Tax-saving FD | 5 years |
| NSC | 5 years and 10 years |
| ULIP | 5 years |
3. Start Small: ELSS, like every other mutual funds, is simple to invest in via SIP. For as little as ₹500, you can begin a SIP for an ELSS mutual fund. And, like other mutual funds, you may increase the amount you invest through SIP top-up as your income grows. And, if you want to earn the entire tax benefit for investment in these funds, you can do so by putting in ₹12,500 every month instead of ₹1.5 lakh all at once. The majority of other tax-advantaged investment products do not offer a systematic means to invest money on a regular basis.
4. Taxation of Mutual Funds Allows You to Save More: The minimum lock-in period for ELSS funds is three years. After three years, long-term capital gains (LTCG) from ELSS mutual funds of up to ₹1 lakh per year are tax-free. However, LTCG in excess of ₹1 lakh is taxed at 10%. When comparing ELSS to PPF (which come under Exempt Exempt Exempt and so, the maturity amount is not taxed), you may believe that the advantage for investing in ELSS is less. However, it should be noted that PPFs have a very long lock-in period, and investments like this are not suitable for meeting short-term or mid-term goals. When compared to a 5-year FD, investment in ELSS is far more advantageous due to its taxation policy. The returns on FDs are taxed according to one’s tax bracket. Furthermore, if you are in the 30% tax level, your FD profits will be taxable at 30%. Meanwhile, LTCG beyond ₹1 lakh in ELSS or any other mutual fund is taxed at 10%. That is, your earnings are taxed at a rate of 10%.
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