Equity Linked Saving Scheme (ELSS) is a type of diversified Equity Mutual Fund which is qualified for tax exemption under section 80C of income tax Act, and offers the twin advantage of capital appreciation and tax benefits.
Advantages of ELSS over other tax saving instrument
ELSS exploits the potential of equities
ELSS funds invest a large part of the fund (usually 65-100%) in equity. With the Indian economy possessing strong fundamentals and corporate earnings showing strong growth potential, equities as an asset class look set to provide attractive returns
Lowest Lock-in period
While the maturity period of other tax saving instruments like NSC is 6 years and PPF is 15 years, ELSS has the shortest lock-in period of all the tax saving instruments under Section 80C. Your investment is LOCKED for a period of 3 years. i.e., once invested in an ELSS scheme, your money cannot be taken out for 3 years. But this is a blessing in disguise, because ELSS schemes generally yield healthy returns during a 3-year period.
An investor can opt for a dividend option and get a part of the investment back during the lock-in period itself, by way of dividend payout
The best way to invest in ELSS is perhaps via Systematic Investment Plan (SIP). With SIP, you can invest a small amount every month for a specific time period. In SIP, the investor can take advantage of fluctuations in the stock market and get the benefit of averaging. So the investor will get more units when the market is down and get fewer units when the market is up.
For e.g. If you are investing Rs. 1000 every month, you will get 100 units when the Net Asset Value (NAV) is 10 and will get 50 units when the NAV is 20. So investing a fixed sum regularly helps to cover the market fluctuations through ‘rupee costs averaging
Tax benefits – no tax on capital gains and dividends
The profits on the sale of ELSS units are treated as long-term capital gains (assuming that the units are sold after the completion of a 3-year lock-in period), and as per current tax laws, these are not subject to tax. Also, there is no dividend distribution tax on equity investments and dividends earned are tax free in the hands of the investor.