By Arina Smith
Who doesn’t want to save on tax? Every taxpayer is always on the lookout for the best tax-saving investments for their portfolio. The reason is quite obvious – the more one saves on tax, the greater would be their take-home income. This is why tax planning is utterly important. Consider this, Section 80C of the Income Tax Act, 1961 offers several tax-saving investments to an investor. Tax-saving investments like PPF and FD are slightly less-efficient than ELSS funds when you take into account their lock-in period and average returns provided by these investments over a period of time. Thus, ELSS funds are a class apart. Let’s understand these tax-saving mutual funds in detail.
What are ELSS Tax-Saving mutual funds?
Just like any other mutual fund, ELSS funds pool the money collected from several investors and invest it in varying stocks of several companies. However, ELSS funds are mandated to invest a minimum of 80% of their assets in equity and equity-linked investments. What’s more, as per Section 80C of the IT Act, 1961 ELSS investments are eligible for a tax deduction of up to Rs 1.5 lac. You can save up to Rs 46,800 per annum by investing in ELSS mutual funds, provided that you fall into the last tax bracket. Thus, these funds offer an investor with dual benefits of wealth creation and tax-saving benefits. ELSS mutual funds have a mandatory lock-in period of three years. This also happens to be the shortest lock-in period has a lock-in period of 15 years and 5 years respectively.
Who should invest in ELSS?
ELSS tax-saving funds are ideal for investors who are looking for tax-saving opportunities along with the potential of wealth creation over time. ELSS investors can expect their funds to be highly invested in equities as ELSS funds invest at least 80% of their assets in this asset class.
Investors investing in ELSS funds usually have a long-term horizon. As equity securities are believed to show their full potential when invested for a long duration. What’s more. ELSS investments have a mandatory lock-in that ensures that the investors stay invested.
Investors well-versed with the knowledge and workings of equity schemes can choose to invest in ELSS funds. This is because equity markets are quite volatile and to completely benefit from equity investments, one should know how to use them to their benefit. On the other hand, investors that are less-skilled with equity or nearing retirement might consider investing in less volatile investment options such as National Pension Scheme (NPS), Public Provident Fund (PPF), or fixed deposits.
Investors should note that if they have already availed of the Section 80C benefits of Rs 1.5 lac, they might consider investing in diversified equity schemes. Choose a mutual fund that best aligns with your interests. Your mutual fund investments must be in line with your risk profile, investment horizon, and financial goals. Happy investing!
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