ELSS being a special category of equity mutual funds is one of the best investment choices for saving tax under Section 80C. While there are other investment options such as National Savings Certificate (NSC), Tax Saving Fixed Deposits (FDs) and Unit Linked Plans (ULIPs) that also fall under Section 80C category and qualify for the same tax deduction, ELSS holds an edge over them on many counts. However, like any investment option, ELSS also has certain drawbacks.
Checkout the pros and cons attached with ELSS funds
Pros
- Lowest lock in period
Among all Section 80C investment options, ELSS funds offer the lowest lock in period of only 3 years. Remaining 80C investment options such as NSC, ULIPs, tax saving FDs come with a higher lock in period of 5 years, PPF has a lock in period of 15 years and National Pension Scheme (NPS) remains locked in until retirement. Thus, ELSS provides the highest liquidity among all options available in Section 80 C.
- Higher return generating potential
As ELSS is a tax saving equity fund, it primarily invests in equities and equity linked instruments. The funds are diversified equity mutual funds and stocks that are chosen from across the market capitalization and industry sector. They also have a lock-in period of 3 years, which renders sufficient time to the fund manager to make investment calls with comprehensive outlook.
Though volatile in the short term, equities over the long run have the potential to beat other asset classes, especially, debt funds, fixed deposits etc. and inflation by a wide margin. Thus, if you are one of those looking to save tax as well as generate higher returns over the long run (specifically for a period of 5 years and above), ELSS fund is one of the best choices for you.
- Tax free returns on LTCG (Long term capital gains) of within 1 lakh
Investments in equities held for more than 1 year attracts LTCG. LTCG of over Rs 1 lakh are taxable at 10% without any indexation benefits while LTCG on equities of up to Rs 1 lakh are tax-free. Among Section 80C investment choices, only PPF comes with tax free maturities whereas other options like the tax saving FD is taxable as per the investors tax slab.
- Instils financial discipline
Like any other mutual funds, one of the prudent ways to invest in ELSS funds is through SIP mode. SIP permits you to invest a predefined amount at periodic frequencies irrespective of the market scenario to form a desired goal corpus over time. This automatic and periodic deduction of investment inculcates financial discipline. By disseminating your investment throughout longer periods, SIP enables you to average your investment during market dips or corrections.
Cons
- Limited tax benefits
Section 80C permits maximum deduction of Rs 1.50 lakh for investments in specific financial avenues falling in this section. This means, if you have already reached the limit of Rs 1.50 lakh under Section 80 C by investing in other 80C investment options apart from ELSS, then you will not be able to avail a tax benefit on ELSS.
- Not for conservative investors
As ELSS funds tap into the equity markets, this option should be carefully considered by conservative investors because it poses high volatility risk in the short term. However, over the long run, equities hold high potential to beat other asset classes and inflation by a wide margin. Thus, investments in such funds are best for achieving long-term financial goals like post retirement corpus creation, child education/marriage corpus creation etc.
Conclusion
ELSS are a prudent tax saving investment option if you want higher returns through exposure in equities. While returns are good in ELSS if invested for a longer period, tax saving benefits on them are restricted just up to Rs 1.50 lakh. Thus, if you are already nearing your 80 C limit, investment in ELSS would not make much sense. In such a case, you may choose a different category of equity mutual fund as per your risk appetite.
