ELSS is a type of diversified open-ended equity mutual fund that primarily invests in equities and equity related products. ELSS is among investment options that qualify for tax deductions under section 80C of the Income Tax Act 1961 and also has the shortest period of lock-in of the investment amount i.e. 3 years when compared to all other avenues available for tax saving.
When it comes to tax-saving, many of us tend to do it at the end of the financial year which may not be considered a good strategy. Tax saving is an essential consideration for investing in these funds but this needs to look with a vision of creating wealth as well because ELSS has the potential to generate inflation-beating returns.
Popular features of ELSS
Shortest Lock-in period: ELSS funds have the shortest lock-in period of only 3years. In comparison, some popular tax saving avenues like PPF or tax-saving bank fixed deposits comes with an extended lock-in period for instance PPF has a lock-in period of 15 years, while tax-saving bank fixed deposits have a lock-in period of 5 years
Inflation beating returns: with its investment strategy of participating predominantly in the equity market ELSS helps you to earn returns directly linked with the stock market's performance.
Tax Treatment: Returns earned in ELSS get taxed at a rate of 10% if the total return exceeds Rs.1 Lakh but since it can generate comparably higher returns that's why it remains a popular tax saving avenue.
Since ELSS is one type of an open-ended scheme so investment in this scheme can be done in a recurring way also through SIP mode which ultimately makes ELSS an investment with triple benefits i.e. tax saving, potential to generate inflation-beating returns over the long term to build wealth and option to lower down your cost of investment through rupee cost averaging which is an inherent feature of SIP. It should not only look at as an option to saving rather it should be aligned with your long-term goals for example your retirement, your kid's higher education, etc.
One of the most important things that investors need to know about investing in ELSS through SIP mode is that each installment is locked in for a period of 3 years. This also means each installment will have a different maturity date.