ELSS vs Other 80C Investments – What Makes ELSS the Best Tax Saving Option?
- Rashmita Choudhary
- Jul 13
- 9 min read
ELSS funds emerge as a viable and a cost-effective method of tax savings compared to other alternatives under Section 80C. The benefits of ELSS include expert fund management, which can result in wealth building, and a shorter lock-in period of three years compared to all other tax-saving options. This article offers a comprehensive comparison between ELSS tax-saving mutual funds and other 80C investments and also explains what makes ELSS the ideal choice for tax savings.
Table of Contents
What are ELSS Mutual Funds?
Nearly all of India's fund houses offer ELSS mutual funds, which are expertly managed by seasoned financial professionals known as fund managers. The only mutual fund class that can get tax deductions is ELSS mutual funds. ELSS, which come under Section 80C, can save you up to Rs 1,50,000 in taxes over the course of a fiscal year. You have the option to invest more than this sum, but you will not be eligible for tax benefits under Section 80C for an investment beyond Rs 1.5 lakh. Long Term Capital Gains (LTCG) tax is applicable to ELSS returns at a rate of 12.5% above Rs. 1.25 lakh.
Types of ELSS Funds
Growth plans: Growth funds, in which the entire fund's value is achieved at the moment of redemption, are highly helpful for long-term wealth creation programs for investors.
Income Distribution Cum Capital Withdraw Plans (IDCW plans): SEBI changed the term "dividend option" in mutual funds to "IDCW" in April 2021. If the dividend from IDCW distributions during a financial year exceeds Rs. 5,000, the amount is taxed as "Income from other sources" along with a 10% TDS.
ELSS vs Other 80C Investments: Why ELSS is a Better Choice?
According to experts, these funds continue to be among the greatest ways to save taxes, even with the new tax regime that taxes long-term capital gains from ELSS. Your portfolio may benefit greatly from ELSS. These equity-linked securities are a great option for long-term investments because they may yield larger returns. Despite taxable returns, ELSS outperforms all other investment choices under Section 80C when it comes to post-tax returns.
Higher ROI of ELSS
Since ELSS primarily invests in equity instruments, the long-term returns it generates are much higher than those of the majority of alternative investment options with tax savings. In addition to lowering your taxes, this also increases your returns and profits. For someone who is prepared to invest for a medium to lengthy period of time, ELSS can be the best option. According to historical data, ELSS generates roughly 12% over a ten-year period or longer. This is a substantial gain in comparison to the meagre 8% returns provided by PPF.
ELSS and Protection in Volatile Times
For equity-linked securities, investors frequently prefer starting with ELSS mutual funds. These funds are used by many equity investors to begin their equity-linked investments before moving on to equity mutual fund schemes. Additionally, these funds provide a robust buffer against the potential volatility associated with stock market investments. The plan includes measures to mitigate the effects of market lows in addition to taking advantage of market highs.
Shorter Lock-In Tenure of ELSS
The lock-in duration for ELSS is three years. With a lock-in period of just three years, ELSS is a much better choice than the PPF, NSC, and EPF, which have a minimum of five years.
Flexibility of ELSS
It's likely that your ULIPs, which you purchased at a discount from insurance companies directly, would eventually produce returns comparable to those of an ELSS. However, the flexibility of ELSS is something that a ULIP does not provide. Since you are not obligated to sign a multi-year contract, you are free to switch to another fund if you are dissatisfied with your ELSS fund. If you are dissatisfied with a ULIP, you can only switch to and invest in other funds that the ULIP offers.
ELSS Combination with PPF
The fact that ELSS can be combined with PPF to yield even greater advantages is another obvious advantage over its competitors. This combination provides a strong foundation for revealing the earning potential of ELSS and the stability provided by PPF. There are further benefits to this arrangement if you look closely. Your portfolio is well-diversified with a mix of debt and equity, and you have the security of government-backed assets together with the potential for growth through shares.
Taxability of ELSS Returns
Not all of the proceeds from ELSS redemption are tax-free. Up to Rs 1,25,000 in annual long-term capital gains are tax-free; any gains over this amount are subject to 10% long-term capital gains tax plus any relevant cess and surcharge. Dividends from your ELSS investments are taxed at your income tax slab rate and added to your total income. According to Section 80C of the Income Tax Act of 1961, ELSS is the optimum tax-saving investment option even though its redemption proceeds are subject to taxes.
LTCG of ELSS
LTCG on ELSS up to Rs 1.25 lakh- Nil
LTCG on ELSS above Rs 1.25 lakh- 12.5%
How Does ELSS SIP Work?
The simplest method of investment in mutual funds is through a systematic investment plan, or SIP. It enables you to gradually spread out your investment. You can make small, frequent investments. Depending on your comfort level, you can choose a weekly, monthly, quarterly, or bi-annual SIP frequency. You buy a specific number of fund units with each SIP instalment, which is equal to the ticket size of your SIP. Section 80C allows for deductions for the amount invested through each SIP. You are able to deduct up to Rs 1.5 lakh.
Investing in ELSS Through SIP
You must have an investment account with the fund house in order to invest in an ELSS. Before you can begin investing, you need to finish your KYC verification. Once these conditions are met, you can connect your investing account with the fund house and start a buy transaction. You must select "SIP" as your investment method and provide the necessary information, including the SIP's frequency, ticket size, and duration. You might think about turning on ECS on your bank account to streamline the investing procedure. As an alternative, you can also order your banker to make a fixed deposit on your behalf at specified times into the fund plan of your choosing.
Things to Know Before Investing in ELSS
Any amount can be invested in an equity-linked savings plan. However, Section 80C of the Income Tax Act of 1961 only exempts investments up to Rs 1,50,000 annually.
It is among the greatest investment choices with tax advantages, a short lock-in period of three years, and the possibility for larger profits.
Investors can get dividends tax-free, and long-term capital gains on ELSS are tax-exempt up to Rs 1.25 lakh.
Even after the three-year lock-in period has ended, you can still invest in this scheme.
In contrast to a fixed deposit or PPF, ELSS carries a larger risk, but it also offers the possibility of higher rewards.
Before making any investments, it is crucial to take into account your investment goal and all of the fund's features.
ELSS vs NPS
Under Section 80C of the Income Tax Act of 1961, two of the most well-liked tax-saving investment alternatives are the National Pension System (NPS) and the Equity-Linked Savings Scheme (ELSS). Because it has a three-year lock-in period and the potential to yield larger returns, ELSS is superior to NPS. NPS investments, on the other hand, are fixed until your retirement.
ELSS vs PPF
Under Section 80C of the Income Tax Act of 1961, the Public Provident Fund (PPF) and the Equity-Linked Savings Scheme (ELSS) are well-liked tax-saving investments. With the potential to yield returns between 12% and 15%, ELSS is superior to the other option. However, PPF's returns are limited and will never be able to compete with ELSS's. Additionally, PPF investments have a 15-year lock-in duration, while ELSS investments only have a three-year lock-in period.
Conclusion
ELSS is regarded as one of the riskiest investment alternatives among the tax-saving options available under Section 80C of the Income Tax Act because it is an equity-oriented investment option. In the long run, ELSS investments have the potential to yield a far higher return than the other 80C investment options, despite being vulnerable to market risks, particularly in the short term.
Frequently Asked Questions
What is ELSS?
According to Section 80C of the Income Tax Act of 1961, an equity-linked savings system, or ELSS, is an investment that can save taxes. You can save up to Rs 46,800 in taxes annually and receive a tax refund of up to Rs 1,50,000 by investing in ELSS. Shares and other equity-linked securities make up the majority of these funds' portfolios.
What are ELSS funds?
A type of mutual fund known as an ELSS Fund is qualified for tax deductions under Section 80C of the Income Tax Act of 1961. Up to 65% of the assets in these equity-oriented mutual funds' portfolios are invested in securities like shares. One of the best ways to save money on taxes and plan for the future is to invest in ELSS funds. You can benefit from both tax benefits and long-term wealth building with an ELSS portfolio.
ELSS deduction under which section?
As per Section 80C, ELSS mutual funds offer tax deductions.
Is ELSS tax-free on maturity?
Not the entire ELSS redemption proceeds are tax-free. Up to Rs 1,25,000 in annual long-term capital gains are tax-free; any gains over this amount are subject to 10% long-term capital gains tax plus any relevant cess and surcharge.
What is the ELSS limit?
There is no upper limit on the amount you can invest in ELSS, although different fund houses have different minimum investable amounts. The only tax-saving investment that has the ability to yield returns that outpace inflation is an ELSS fund.
How much to invest in ELSS?
With ELSS, the amount that can be invested is unlimited. Nevertheless, the annual tax savings are limited to Rs 1,50,000. You might initially think about spending Rs 1.5 lakh annually to fully utilise your Section 80C limit. You can invest more than this limit after it has been reached, if you are prepared to let your investment remain locked in for three years. If not, you might want to think about investing in open-ended mutual funds.
How to open an ELSS account?
You must first open an investment account with the fund company of your choice in order to invest in an ELSS. It costs nothing to open an investment account. After that, you must go through KYC verification, which requires a valid proof of address, a PAN, and a photo in the format specified. After that, you can choose the fund house's tax-saving or ELSS mutual fund and buy its units.
Why ELSS is better than PPF?
According to Section 80C of the Income Tax Act of 1961, the two most well-liked tax-saving investment options are the Public Provident Fund (PPF) and the Equity-Linked Saving Scheme (ELSS). The Government of India regularly modifies and limits the returns provided under PPF. However, when the investment horizon has been longer than five years, the return potential of an ELSS is uncapped and has typically produced significantly larger returns than PPF. Additionally, PPF has a fifteen-year lock-in period, but ELSS only has a three-year lock-in period. ELSS is the ideal Section 80C investment choice due to its shorter lock-in period, higher potential return, and convenience of investing.
What is the lock-in period in ELSS?
ELSS mutual funds have a three-year lock-in period, much like all other Section 80C investing alternatives. The time range before which investments cannot be redeemed is known as the lock-in period. While some investments permit early withdrawals in exchange for a penalty, ELSS does not have any such clauses. Your investment cannot be redeemed until three years have passed from the investment date.
Can I redeem my entire ELSS investment after three years?
Depending on the state of the market, you should choose whether to redeem. You might consider redemption if the market is rising and the NAV is high. But each investment has a three-year lock-in period of its own. Therefore, units bought with the initial instalment of a monthly SIP investment will be free to redeem three years following the SIP's start date. Following the completion of three years from the date of the corresponding contributions, subsequent instalments will be free.
How to redeem ELSS after 3 years?
You can redeem your mutual fund investments in one of two ways. One is choosing to remove a large chunk of money all at once. Second, start an SWP, or systematic withdrawal plan. It involves taking out a set amount on a regular basis.
Who should invest in ELSS?
ELSS is an ideal investment alternative for salaried individuals. It's also appropriate for people who can stay invested for a long time in order to receive better returns and who are willing to take on short-term risk.
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