Tax saving measures gain momentum during months between Januarys to March. A lot of tax saving options is available to you in the form of PF, NPS and NSC. Let us now explore how to invest in ELSS as a tax saving option.
Hardly any surprises under section 80 C
No surprises! Any investment in ELSS is liable to a tax deduction of Rs 1.5 lakh under section 80 C of the Income tax act. Under this section you can avail a minimum tax deduction of 1.5 lakh but no limit exists on investing in such schemes. You are free to make an investment of more than 1.5 lakh, though the extra amount can entitle you to deductions. In hindsight investing around 1.5 lakh in ELSS can fetch you a tax deduction of 46,350 which is dependent on the income tax applicable to you.
Lock in period at a lowest level
Any tax saving instrument has a mandatory lock in period. For example PPF permissible under section 80 C has a lock in period of 15 years. From the 7th year onwards you can make partial withdrawal from your PF account. Any other tax saving instruments has a minimum lock in period of 5 years, though with ELSS the lock in period is 3 years. Any investments that you make in ELSS can be sold after 3 years.
A point to consider though ELSS might be have a lock in period of 3 years, a sensible move is to invest in ELSS having a horizon of 5 years. A reason being to be on the safer side as ELSS mainly invests in stocks and considering the vibrant and volatile nature of stocks.
From equity exposure a major benefit
If you consider yourself to be a conventional investor who prefers tax saving investments with steady returns, then making a move to ELSS is a sensible choice. It would provide you with a short term exposure to equity. For a first time investor to a stock market it is a preferred choice. A mandatory lock in period of the stock market would give investors an idea on the protocols of stock market. In addition in ELSS the fund manager is not bothered about unexpected redemption. They are likely to adopt a buy and hold strategy to maximize returns. In figures ELSS in the last 5 years has returned around 18.84 %.
You can devote your investments in ELSS for a long term investment perspective. Out of all investment options equity is an obvious choice as long term returns are assured. Even they might be able to beat inflation by a large margin. It is imperative that you need to earn more than inflation in order to generate wealth.
To conclude any tax saving instrument like PFF have a maturity date. Once the date arrives of maturity you have an option to renew it for another 5 years. With an ELSS there is no maturity date as you can hold them to the point you want them.