To save tax, one of the most promising is equity-linked savings schemes (ELSS).ELSS are diversified equity mutual funds that invest a major chunk of your money in equity and equity-related securities.Investing in ELSS funds makes you eligible to avail tax deduction of up to Rs 1.5 lakh under section 80C of the Income Tax Act, 1961
However, there are certain things you need to keep in mind before investing in ELSS.
1.Way to get exposure to equity markets
It might be possible that you desire to invest in equities but don’t know where to start. Try ELSS funds as your first step. As compared to directly investing in stock markets, ELSS funds are an ideal way to get exposure to equities.One thing that you need to be aware of is that ELSS comes with a lock-in period of three years
Expectation of maximum returns
ELSS funds have the potential to generate higher returns than other investment avenues. But you cannot be unrealistic about returns on investment. Moreover, there are no guaranteed returns in equities. The fund performance may vary across different time horizons. Only when you stay invested for a longer investment horizon, could you hope for higher returns.Risks involved in investment
Equity funds carry a higher risk of fluctuation in Net Asset Value (NAV).All you need to do is stay invested for a longer investment horizon. As compared to other asset classes, equity funds have found to give above average returns in the long run.Lock-in period of investment
Among all other tax-saving products offered under Section 80C, equity linked savings schemes (ELSS) has the shortest lock-in period. It has a lock-in period of 3 years which means that you cannot redeem your investment before completion of 3 years. Comparatively, a Public Provident Fund (PPF) has a lock-in period of 15 years and National Savings Certificate (NSC) comes with a lock-in period of five years.ELSS, being an equity investment, need you to have a long-term investment horizon of at least 7 to 10 years.Maximum tax exemption limit
Section 80C is an extensive section which includes numerous investment avenues, like Employees Provident Fund (EPF) and life insurance policy, that are eligible for tax deduction. The maximum tax exemption limit available under Section 80C is Rs 1.5 lakh. If you have already claimed some of the exemption via other investments, then your entire investment in ELSS may not be available for deduction.
