Why ELSS is Good Investment? ELSS Tax Benefit and Comparison with other Tax saving investments

In the current financial market so many people tend to look for cutting their taxes at best level possible and they look for different kind of tax saving investment available in the market. This is widely known that as our income increases the need for tax saving also increases at the same point of time. If you have higher income, you are likely to fall in higher tax slab and no one wants to give their hard earned money in taxes. Therefore need for minimizing income tax is quite higher at the moment.
We have got so many legal ways to reduce our taxes and there are several types of financial instruments available which can be used for tax saving. The Equity Linked Saving Scheme (ELSS) is one such a scheme which is largely famous for tax saving investment and so many people use this for their tax portfolio. ELSS gives us tax benefit under 80C of Income Tax which means the amount, you have invested in these specified investments can be used to reduce your total taxable income.
“Though under section 80C give benefit for only 1.5 Lakhs and you can’t claim more that this amount as tax reduction. Along with this there are several other conditions as well; these conditions vary for different investments. ELSS has got some extra benefit for investment that makes it more attractive.”
Tax savings through ELSS:
The investment made up to 1.5 Lakhs in ELSS is valid for tax deduction under section 80C of Income tax. Let’s assume you fall in 30% tax slab and have made an investment of Rs 1.5 Lakhs in ELSS, this investment can save tax up to Rs 46350. Whereas for peoples in 20% tax brackets this tax saving would be Rs 30900 and Rs 15450 for 10% tax slab.
Why ELSS is a good investment for Tax benefit:
Lock in period of ELSS
There are several tax benefit schemes available from government but it all comes with certain limitations and lock in period. You can not withdraw your investment amount before that period of time; while ELSS has lock in period of 3 years which is the shortest lock in period among all tax saving scheme available in the market.
 ELSS SIP and lock in period:
Systematic Investment Plan (SIP) is smart way of investing and you have an opportunity to invest in ELSS through SIP as well. But people get confused while investing in ELSS through SIP and they don’t get proper knowledge for lock in period. What would be the lock in period for this investment? Would it be the three years from the beginning date of SIP? Or would it be 3 years from the End date of SIP?
This misunderstanding occurs due to the lock in rules of EPF, PPF and Recurring deposit. In the EPF, PPF and RD the lock in is counted from the start of SIP. However, in the ELSS, every input has its own lock-in period. It has no relation with the start date of SIP. It means the last SIP contribution would remain locked for another three years.
Investment Limit in ELSS
There is a minimum amount limit for each investment in mutual fund and amount can be set by mutual funds as per their consideration but ELSS scheme don’t have such liberty. Rather, the government has fixed minimum amount of Rs 500, for the investment into the ELSS. There are mutual fund houses which have set minimum amount of Rs 5000 for all the mutual fund schemes except the ELSS. On the other hand, there is no maximum limit to invest in ELSS scheme but you are restricted to take tax benefit up to Rs 1.5 lakh under section 80C.
Main Features of ELSS:
For an investment, there can be tax benefit on 3 occasions.
  1. Tax deduction at the time of investment
  2. Tax Exemption on periodic interest
  3. Tax Exemption on Maturity Amount
If you investment gets the tax exemption on all the three occasions, It would be EEE (Exempt, exempt, exempt) category of tax exemption. ELSS falls in this category.
There is tax saving investments where only initial investment amount gives tax benefit. The interest income becomes taxable. For instance, NSC and tax saving FD. There are investments, where the maturity amount becomes taxable, Such as pension plans.
But, In the case of the ELSS, you can relax during redemption. It is not because the government has made any special provision for the ELSS. Rather, it is because of the zero long term capital gains tax.
The investment in shares becomes tax free after one year. You don’t need to pay any tax on the profit from shares if it was kept for one year or more. The ELSS is locked for 3 years; therefore it automatically comes under zero long term capital gains tax category.
Comparison between ELSS and other Tax Saving Schemes on different points:
As we know that ELSS has the lowest lock in period and it gives all round tax benefit. So here I am going to compare ELSS and other Tax Saving schemes on different points.
Investors first think about return while they are making any kind of investment so it should be really fine if we compare returns on first priority
It gives the return comparable to the bank fixed deposit. It is 8.1% at the time of writing this post. Compounded Yearly.
It gives fixed interest for the five years. It is 8.1% now & compounded half yearly.
Tax Saving FD
It also gives fixed interest rate for five years. It would be almost same as the NSC and PPF. Compounded Quarterly
It does not give fixed interest rate. Rather, your investment grows. The return is not guaranteed. It can be very high as well as the negative returning.
Lock in Period:
Next point come lock in period during investment as we all have to think how long I can engage my fund. So here we go
Lock In
The PPF account matures in 15 years. The money is locked till the maturity. However, you can take loan or partially withdraw the amount if required
The money gets locked for at least 5 years.
Tax Saving FD
It also has the lock in period of 5 years
It has lowest lock in period of 3 years.
Next important point investor consider is safety. What is the safety of my hard earned money in particular fund; if fund has safety investor will be more than happy to invest in.
It is a safe investment. The government of India keeps your money and gives interest rate according to market rate
It is also a government scheme. The interest rate is linked to Government bond.
Tax Saving FD
The banks keep the deposit. Bank’s deposits are secure. The interest rate are fixed according to market condition
The money is invested in shares. It usually gives good return in the long term (more than 10 years). But, In the short term you may lose the money.
Taxability of Fund
So after considering all above points, an investor thinks about taxes as everyone wants to save taxes on their investment. All above mentioned scheme gives tax benefits but they all have dissimilarities.
Tax Treatment 
Every contribution to the PPF account is eligible for tax deduction. The interest earning and maturity amount is also exempted from tax.
The investment enjoys 80C benefit. But, earned interest is taxable. The redemption of original amount is tax free.
Tax Saving FD
It is similar to NSC. Only interest part is taxable.
There is no tax on earning and redemption. The investment is already eligible for tax deduction.
What should you know about ELSS before you invest?
  • You can invest any amount in an Equity-Linked Savings Scheme, but only donations of up to Rs 1,50,000 are tax-free under Section 80C of the Income Tax Act.
  • It’s one of the greatest investing options because it combines tax advantages with the possibility of higher profits and has a short lock-in period.
  • Whether its dividend income or capital appreciation, the returns on Equity-Linked Savings Schemes are tax-free.
  • Even after the three-year lock-in period has ended, you can continue to invest in this scheme.
  • When compared to a fixed deposit or a PPF, the risk associated with ELSS is higher, but the potential profits are also higher.


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