Why is ELSS better than other tax saving options

Ask, how do we save taxes under sec 80CC of the IT Act? Invariably we use age old products like LIC, PPF, PF, NSC etc. Let us look at how ELSS (Equity Linked Savings Scheme) fares as compared to all these tax saving options.

Higher Returns: Over a long period of time, ELSS has beaten every other tax saving product by a wide margin. Though, they remain volatile in the short term. However, over a long-term period returns stabilize and supersede returns of all other tax saving instruments.

ELSS has shortest Lock-In Period: ELSS comes with a lock-in period of only 3 years. This is the shortest lock in as compared to all other tax saving instruments. NSC have 5-year lock-in period, PPF has 15 years of lock-in period, ULIPs, the nearest competitor in terms of returns, has 5 years of the lock-in period.

Benefits of Tax-free dividend and maturity: ELSS falls under the EEE (exempt-exempt-exempt) category. And, the exemption ambit incorporates not only investment amount but, the dividend income and maturity proceed too. Only PPF is the other eligible tax saving product which falls under EEE category. Investors also confuse ELSS to ULIPS. This is incorrect. If insurance cover is less than 10 times the annual premium, then the whole maturity proceeds are taxable.

ELSS instills financial discipline in the investor: As ELSS enables you to invest regularly via Systematic Investment Plan (SIP), the periodic and automated investment schedule compels you to save and invest regularly. ELSS enables you to invest a small sum of money every month.

Some worth-pondering points while investing in ELSS:

  • While committing investment make sure that you fully understand and analyze the risks associated with the ELSS.
  • If one’s risk appetite is low to moderate one should go for investment in large-cap ELSS funds.
  • If your eyes are set on a longer horizon and have a high-risk appetite, then you can opt for mid-to-small cap ELSS funds

Thus, importing Section 80C in letter and spirit, ELSS offers high yields that too tax-free! It is the best when you stay with it for the long term.