Planning to save taxes can be a challenge especially people who belong to the corporate world. Tax paying individuals look out for options to curb paying high taxes at the last moment of a fiscal year and end up making choices that are unfavorable. Financial experts often interpret tax planning products as a path to achieve financial goals apart from saving taxes. People often think of products such as Public Provident Fund (PPF), Fixed Deposits (FDs) and National Savings Certificates (NSC) that can help them save upto Rs, 1,50,000 under section 80C of the Income tax act. All these options which are good to invest in, but have limited return potential. Those looking for equity like returns and require some allocation in the equity asset class apart from debt, can consider Equity Linked Savings Schemes (ELSS) mutual funds as they are a great way to save taxes in comparison to traditional investments.

Equity Linked Savings Schemes (ELSS).

Equity Linked Savings Schemes (ELSS) are one of the best ways for Indian investors to save taxes while making an investment that offers a significant chance of making decent returns. Investing in ELSS Mutual Funds is an easy way to save taxes under Section 80C of the Income tax Act 1961. A long term ELSS investment can be used to build a retirement corpus also.

Below are few reasons why one should invest in Equity Linked Savings Schemes –

•       Great Returns – ELSS tax saving mutual funds have delivered annualized return of over 15% historically. ELSS invests in stocks which allow money to grow along with saving taxes under the section 80C of the income tax act.
•       Short Lock-in Period – Compared to other tax saving options under section 80C like PPF, NSC, and FDs, ELSS tax saving mutual funds have a shorter lock-in period. While FDs and NSC have a 5-year lock-in period, PPF has a 15-year lock-in period, ELSS funds only have a 3-year lock-in period.
•       Dividends – Depending on a client’s financial goals and needs one can either opt for either dividend option or growth option. If the client is willing to realize some potential gains during the lock-in period, dividend option can be opted over growth option.

Please note that the NAV will fall to the extent of the dividend payments on the payment date.

•       SIP Advantages – ELSS funds gives the opportunity to start investing without allocating a huge one-time investment amount. By investing a fixed amount of money every month on the same date, one inculcates discipline by keeping finances and investments in check.

Different types of ELSS funds invest in different type of stocks as well as different industries and market capitalizations (size of the company). Some funds have higher allocations in large cap stocks (larger sized companies) while some towards mid-caps. It is best to choose an ELSS mutual fund that aligns best with your financial goals, needs and risk appetite.

Remember the objective to investment using ELSS is not only for tax saving but also for building a corpus. Hence, it is better to invest on regular basis rather than invest towards end of the financial year. Regular investments can prevent the investor from being caught on the wrong end of the market. 

ELSS funds have a host of advantages like higher returns, shorter lock-in periods and systematic investment plans. It is ideal to seek help from a financial expert to find out how ELSS schemes can help you optimize taxes and make smarter investments in comparison to other traditional investments.