Investing in mutual funds is one of the easiest ways to save on taxes, as well as earn some extra money on the side. ELSS especially, is one of the most preferred investments to save on taxes. Besides offering tax exemptions under section 80C, the Equity Linked Savings Scheme also offers two more advantages: it provides investors with the dual benefit of capital appreciation or capital gain, and tax saving. This savings scheme also includes a three year lock-in period. Let's take a closer look at the tax-saving benefits of ELSS:
Income Tax Benefit: With ELSS, investors can get a tax deduction of up to Rs. 1.50 lakhs under section 80C of the Income Tax Act of 1961.
Short Lock-In Period: The three year lock-in period of ELSS funds is much shorter than the lock-in periods demanded by other investment avenues like PPF or NSC under section 80C of the Income Tax Act.
Tax-Free Dividends/Capital Gains: All dividends that are declared under ELSS are exempt from tax. When ELSS units are sold, the profits made from the sale are considered as long-term capital gains and are tax exempt.
Higher Return: In the case of ELSS funds, a large part of the fund is invested in equity. Equity has the potential to generate wealth in the long run, even though it is affected by short-term volatility.
Investing in an Equity Linked Savings Scheme is a great solution for certain types of investors. If you are an investor looking to generate wealth over a long period of time, then ELSS is a good investment for you. If you are looking to invest in something that will provide you with tax deductions under Section 80C, then ELSS is an investment that should definitely be considered. If you have an investment time horizon of three years or more, then you can consider investing in ELSS funds.
When it comes to investing, an approach of investing in small amounts but at regular intervals is a much wiser strategy than investing a huge amount in one shot. This is why Systematic Investment Plans or SIPs are a good idea. SIP is a method of investing in which you can invest tiny amounts in mutual funds, at regular intervals.