As the end of a financial year approaches, employees roll up their sleeves and get involved in assessing different tax saving investment planning options available under Section 80C.
Some of the most common schemes that have so far been popular among employees looking to save taxes include Unit Linked Insurance Plans (ULIPs), National Savings Certificate (NSC), endowment policies, Public Provident Fund (PPF) and bank fixed deposits meant for tax saving.
But new age investors like to look beyond these conventional options, choosing to invest in tax saving mutual funds like Equity Linked Savings Scheme (ELSS). ELSS offers a host of benefits to investors, some of which have been discussed below-
- ELSS offers high returns-
ELSSs are nothing but mutual fund schemes that offer tax saving benefits. When invested in an ELSS, the investor’s money goes into equity funds and related instruments. No doubt, equities pose some risks over short investment periods, but their effectiveness outstrips most other financial instruments over the longer run. If you are an ELSS investor, you can expect more than 12% annualized returns from your investment. Some of your peers, with their money probably invested in other more stable asset classes, will be able to earn only about 9% of annualized returns. ULIPs, with their investments in equity funds might deliver similar returns as ELSS but because of high fund management expenses, they fail to outperform ELSS.
- Lock-ins are short-term–
Out of all the Section 80C financial instruments, ELSS has the shortest lock-in period of three years. While tax-free fixed deposits and NSC have a 5 years of lock-in period each, PPFs’ lock-in time stands at a whopping 15 years. ULIPs which may offer you similar returns as ELSS have a lock-in period of 5 years, still longer than ELSS.
If, however, you have decided to sideline these options for the National Pension Scheme, considering it to be one of the safest and best tax saving investments, you might have to keep your money locked in for as long as you are in the service or simply till your retirement.
- Dividends and maturity profits are not taxed-
ELSS is an EEE or exempt-exempt exempt taxation scheme. That means, along with your investment amount, your maturity proceeds and dividend returns are also exempted from tax. The only investment plan under Section 80C, that is covered by the EEE scheme, other than ELSS, is PPF.
- What about some financial order in life?
You can invest your money in the ELSS scheme through the SIP or Systematic Investment Plan. The greatest benefit of getting to invest through SIPs is that you don’t need to invest a hefty sum of money at one shot. You can make small but regular monthly investments, which will prevent you from losing all of your liquid money. In addition, it will inculcate in you a habit of investing regularly.
And because your investment remains spread over a financial year, the investment cost gets averaged out when the market is not favourable.
Now, aren’t these some of the most interesting benefits of ELSS as a tax saving investment scheme? Of course! But if you are a little apprehensive of the risk factor, it would be valuable for you to know that risks come into play only when mutual fund investments are made for a shorter term period.