|Name of Fund||5 Year Returns (p.a.)||Scheme Category|
|Axis Long Term Equity Fund||14.30%||ELSS|
|IDFC Tax Saver Fund||12.67%||ELSS|
|Franklin India Taxshield Fund||12.90%||ELSS|
|DSP Tax Saver Fund||13.86%||ELSS|
|Kotak Tax Saver Scheme||13.90%||ELSS|
Equity Linked Saving Schemes or ELSS is the type of mutual fund schemes that helps the investors in saving their income tax. They are also known as tax-saving fund as it allows deductions under the Income Tax Act. Section 80C of the Income Tax Act allows taxpayers to invest up to ₹1.5 lakh in various investment instruments and claim it as deductions from taxable income. Various other investment instruments under tax-saving schemes include PPF, postal savings, NSC, NPS, FD, and more.
One of the crucial benefits of ELSS funds is that it offers tax exemption. An investor can claim tax benefits of ₹46,800*, with an annual investment up to ₹1.5 lakhs. Although section 80C provides exemption of ₹1.5 lakhs, there is no upper-limit for investment in ELSS scheme. Apart from this, ELSS scheme has low lock-in period of three years. Whereas, it is advisable to invest at least for 5-7 years in ELSS funds. If the goal of an investor is to save tax while growing the money, ELSS can be the best suitable option.
ELSS and PPF are different based on the financial goals of the investor. PPF is a low-risk pertaining instrument. Whereas, ELSS invests in equity and related instruments which makes it volatile and risky. The returns on PPF are lower than ELSS due to the low risk and volatility involved in this instrument. However, the returns on PPF are totally tax-free and that of ELSS are partially taxed. Hence, investors looking for a safe, completely tax-free, and long-term instrument can invest in PPF.
Both the options are equally great with different financial goals. However, the investor should always consider the withdrawal limits before investing. An investor can withdraw his investments partially from PPF along with the added feature of taking a loan against the investment. He can withdraw 50% of his investment post 5-year lock-in period or avail a loan in the 3rd year of investment. Whereas, ELSS offers no partial withdrawal facility during the lock-in period. Hence, the investor should consider the financial goals prior investing.
LIC offers life insurance policies. Whereas, ELSS is the mutual fund scheme. The main goal of LIC is to provide financial security for the investor’s dependents after his death. Typically, the majority of insurance policies provide a small insurance cover if there is saving or investment element in it. Also, the returns on insurance policy are only modest. It is advisable to stick with pure investment options like mutual funds to attain the financial goals effectively. If the investor is willing to take high risk, they can opt for equity oriented hybrid scheme or a balanced scheme.
Tax Savings: ELSS schemes offer tax exemption under section 80C of the IT Act.
Low Lock-In Period: The lock-in period in ELSS funds is 3 years, which is the lowest amongst the various types of mutual funds.
Tax on gains: ELSS offers lower tax on gains as the lock-in period of 3 years falls under long term gains. According to the present IT Act ,any gains above ₹ 1,00,000 will be taxed at 10%.
Compounding Method: ELSS implies compounding method for investments by default. Investors can reap the benefits of this method in the long-run.
Limited Tax Benefit: The tax benefit of ₹1,50,000 include other asset classes also such as, PPF, life insurance, home loan principal and more.
Limited Benefits: The benefits offered on ELSS are only up to ₹1,50,000 and not above.
Market Risk: The returns in ELSS funds are dependent on stock market performance and its volatility.
While investing, an investor needs to make tons of choices. Each of the options has its unique merits and demerits. The best way to deal with this dilemma is by considering the investor’s unique needs and financial goals. One has to keep in mind that the NAV of growth option might be higher than that of a dividend option most of the times. The main reason behind this is the compounding effect. The scheme in identical instruments remains the same, but the manner of distributing returns varies. If the investor is looking for a regular income, dividend option might work well. However, growth option is suitable for the investors looking for long-term investment.
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