Investors invest their money in mutual funds to enjoy a high return. But the return amount shrinks at the time of redemption when you pay tax on your overall return. Hence, investing your money in the funds, which provides you tax benefits under section 80C of the Indian Income Tax Act, 1961 have gained a lot of popularity nowadays. ELSS is the most popular among such funds.
ELSS stands for Equity Linked Savings Scheme. It is a diversified equity scheme commonly known as the tax saver fund. It invests your funds in equity for a long term duration with a lock-in period of 3 years. The maximum year for investment could be 15 years. After the completion of 15 years, you can invest your money in a 5 year block.
ELSS provides you with an exemption of up to Rs.1.5 lakhs per annum under Section 80C. This feature helps the investors to save tax on extra income and reduces your overall tax liability. Besides, there are many advantages provided by this tax saver fund which compels the investors to infuse their money in this scheme. Click here to know more about tax saver funds and its advantages.
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5 advantages of ELSS which provide lucrative options to the taxpayers
Greater post-tax returns
In comparison to other investments like fixed deposits, ELSS offers long term capital gains which are tax-free up to Rs.1.5 lakhs. This tax saver fund benefits you by saving your surplus money from tax liability.
Guaranteed higher returns
ELSS provides a higher return than the other long term schemes. For example, if an investor invests Rs. 1.5 lakh every year with an average interest rate of 13 to 14% (given to ELSS a/c holder), then the actual amount generated at the time of maturity will be a substantial chunk because it invests money in diversified equity instruments for a long term period.
Infusing money in an ELSS account is an easy task. Users get the option to choose amongst many modes of payments, including SIPs (Systematic Investment Plan) or paying lump sum money at a time, as per their flexibility.
Shortest lock-in period
As it is an open-ended equity mutual fund, you can sell them any time after the completion of the lock-in period of three years, which is the shortest lock-in period provided by any tax saver fund. If an investor doesn’t want to stay invested after three years, the return generated out of ELSS a/c will also be tax-free.
Power of compounding
The money gets compounded annually with a tax-free return up to Rs.1.5 lakh which makes it a better option to avail. ELSS is the only scheme which provides you with a higher return on adding yearly or monthly compounded interest. The yield based on this compounded interest gives you a higher inflation-adjusted return. Like if inflation is 6% and ELSS interest rate is 12% to 13%, you enjoy the surplus of 6 to 7% on your deposit.
Different investment options in ELSS funds
As per the convenience of an investor, ELSS provides different options to get returns as per their needs. Some of these are:
Dividend Reinvestments choice: As per the market predictors if the market is going to hike, you can reinvest your dividends received to increase your NAV. Doing this will provide you with high future value.
Growth option: Here, an investor refuses the benefit of getting a dividend. Instead, they appreciate NAV for enjoying higher returns at the time of redemption, as returns are provided on the compounded form.
Dividend option: Under this option an investor enjoys the dividend provided by the company on the basis of profit earned by them. The lender is not bound to pay a specified amount of dividend. Moreover, no regular payments are mandatory. But, the dividend is tax-free as per the ELSS scheme.
Many mutual fund companies provide ELSS, but you should invest in those ELSS schemes which provide you with a high rate of interest. It’s the best option for a salaried person as it provides a risk-free return and accumulates your savings for the procurement of your future goals.