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ELSS vs other Tax Saving Schemes. Which is Better?

Earlier, the Indian investor did not have much options to choose from when it came to tax saving instruments. Although there are few instruments that help you to save tax over the long term, they do not offer excellent interest rate. Investors with long-term financial goals may or may not be able to fulfil these goals through investments in traditional tax saving schemes. Some taxpayers only realise importance of investing when they receive a mail from their HR at the end of the fiscal year to submit investment proof. nice your someone who is young aggressive and keen on saving taxes and at the same time seeking capital appreciate appreciation you can consider investing in Equity Linked Savings Scheme (ELSS). ELSS is the only mutual fund scheme that comes with a tax benefit. ELSS also gives investors an opportunity to see capital appreciation over the long term by investing in equity and equality related instruments.

What is ELSS? 

Equity linked savings scheme is a tax saver fund that comes with a 3 year predetermined lock in period. This means that investors cannot redeem their ELSS fund units for a minimum of 36 months. The mandatory lock in continuous to help investors save tax for a straight three years and at the same time give them the opportunity to see capital appreciation over the long term.

Here’s an example to help you understand how ELSS works:

Asif Khan is a software engineer with an annual income Rest. of 12 lakhs. This lands him in the 30% tax slab. Asif learns about equity linked savings scheme to a colleague and decides to invest rupees 1.5 lakh in the tax saver fund. According to section 80C of the Indian Income Tax Act, 1961 investments of up to Rest. 1.5 lakh per fiscal year are exempted from tax deductions. By investing in equity linked savings scheme as it has now brought down is gross taxable income to rupees 10.5 lakh. 

Why is ELSS better than other tax saving instruments?

Finding reasons to invest in ELSS? Wondering why you should invest in this tax saving scheme and no other traditional tax saving instruments? Here’s why you should consider investing in Equity Linked Saving Scheme:

ELSS is a mutual fund scheme

Apart from helping you save tax this mutual fund scheme invest predominantly in equity and equity related instruments. Equity related schemes are known to provide decent capital gains over the long term. The interest rates offered by ELSS are far better than those offered by traditional tax saving instruments.

ELSS comes with the short lock in period

As compared to other traditional tax saving instruments ELSS has a short lock in period. Tax saving instruments like bank fixed deposits (FDs) come with a lock in period of 5 years. On the other hand ELSS comes with a short lock in period of only 36 months. This means you can redeem or withdraw your ELSS fund units after 3 years if you wish you can even remain invested for even longer.

Track your ELSS online

ELSS scheme can be bought over the internet. You can track the performance of your ELSS fund on a daily, monthly, weekly or annual basis. if the ELSS scheme that you invested is in is not performing well for the long time you can stop investments in that fund  and switch to another better performing fund. Such liquidity may or may not be offered by traditional tax saving instruments.

These awere some of the reasons why one should consider investing in this tax saver fund as compared to conservative investment schemes like public provident fund or bank fixed deposit. However, ELSS is a tax saving mutual fund scheme and we all know the investment made in mutual funds to not guarantee returns.  Investors are expected to determine their risk appetite before making investment in ELSS.

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