3 reasons why ELSS is a good tax-saving tool

An equity-linked savings scheme or ELSS is an equity mutual fund investments which qualifies for tax deduction under Section 80C. For long-term investors, choosing ELSS over other 80C products like PPF and NSC is more beneficial from a wealth creation perspective. Here are three reasons why. 

Long-term returns 

Being linked to equity, ELSS funds can give inflation-plus returns in the long term. While returns are not guaranteed, historically, we have seen that over longer periods of 7-10 years, equity portfolios are consistently able to deliver returns which beat inflation by a reasonable margin. Fixed-return products like savings certificates or fixed deposits are less efficient at doing this over the long term. Those are more oriented to giving income rather than creating wealth.

Shortest lock-in 

For those who like having access to their funds, an ELSS has the shortest lock-in period of three years. Other investment options that are eligible for tax deduction have at least a five-year lock-in. It’s reassuring to know that after three years, you can use the money if you need it in an emergency. However, equity investments are ideally suited to meet financial goals with a time horizon of at least seven years and more; don’t rush to redeem simply because the lock-in period for your units is over.

Enabled for SIP 

ELSS schemes have the SIP facility too that enables you to allocate smaller amounts every month rather than having to put in a lump sum. For those who earn a monthly salary, this is a useful option. However, keep in mind that each new instalment will have a separate date on which the three-year lock-in gets over. For long-term investors, this is not an issue as the investment can well be held for many more years. 

The 80C deduction benefit is limited to ₹1.5 lakh, hence it is important to choose what you populate it with. You have other options like Employees’ Provident Fund, life insurance premium, principal payment of a housing loan and children’s tuition fee to exhaust the deduction limit. If there’s a gap, it should be filled with an ELSS, given the return potential and the flexibility.