Why is ELSS scheme is better for tax saving in 2021?

There are several tax saving instruments which investors can consider helping them get rid of their tax woes. However, not every tax saving instrument is designed in such a way that you are able to save tax and also earn capital appreciation over the long term. Most conservative tax saving schemes that come under section 80C of the Indian Income Tax Act, 1961 come with lengthy lock-in periods. Also, you will be appalled to learn the kind of fixed interest rates these conservative tax saving schemes have to offer. However, there is one scheme that falls under Section 80C which can help you save tax and also give you an opportunity to earn capital appreciation over the long term. 

Equity Linked Savings Scheme or ELSS is a tax saving scheme that comes with a three year lock-in and a tax benefit. ELSS is the only mutual fund scheme right now that offers tax benefit. Also, the three year lock-in which ELSS has is probably the shortest if you consider other schemes that fall under Section 80C whose lock-in periods can extend anywhere between 5 to 15 years.Here’s an example to help investors understand how ELSS works –

Ashwini Ahuja is a digital marketing manager with an event management company who draws and annual salary of Rs. 11 lakhs. This lands her in the highest tax bracket. Ashwini learns about ELSS from a friend and decides to invest Rs. 1.5 lakh in the tax saver fund. Now according to 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1,50,000 in ELSS and claim tax deductions for the same. By investing in ELSS Ashwini’s gross taxable income has now come down to Rs. 9.5(11-1.5) lakhs per annum. Also, the three year lock in gives the amount invested an opportunity to earn interest and might even help her in building wealth over the long term. 

What makes ELSS a sensational tax saving option in 2021?

The year 2021 has been of falling economies and personal exigencies for those affected by the pandemic. This has made several individuals realize that they cannot lock their money in schemes that come with lengthy lock-in periods. It is essential to choose a scheme that is flexible and can help you in case of a financial emergency. ELSS is one such tax saver fund which comes with a short lock-in period. Investors are free to withdraw the capital gains that they earn at the end of their three year investment journey. However, if they do not need the money on an urgent basis, they can even continue investing or let the accumulated sum remain invested to enjoy earning interest.

Also, one does not need to have a large investment amount to start investing in ELSS. Thanks to the introduction of SIP, it is now possible for investors to invest small amounts at regular intervals. A Systematic Investment Plan, also referred to as SIP, is an easy and hassle free way for investing in ELSS funds. All an investor has to do is decide how much they want to invest every month and instruct their bank to allow auto debit. Once you complete all the pre-investment formalities and become KYC compliant, every month on a certain date the predetermined amount is debited from your savings account and electronically transferred to the ELSS fund of your choice. Investors can also refer to SIP calculator, a free online tool that one can refer to get an estimate on the capital gains they might earn at the end of their investment journey.

ELSS is a tax saving fund which predominantly invests in equity markets. Hence, investors are expected to determine their risk appetite and understand their investment objective before investing their hard earned money in ELSS.

What do you think?

Written by Michael Curry

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