For investors, wealth and tax savings are the two desired objectives of investment. ELSS is one such powerful option that satisfies both requirements. ELSS is a category of mutual funds in India that qualified for tax exemption under Section 80C of the Income Tax Act. While a tax-saving investment, the ELSS has gained more popularity lately due to its prospect of giving high returns in the long run. It’s one of the best tax-savers and the best savings instrument for those wishing to amass great wealth over time, as this piece tries to establish.
ELSS: The Best Tax-Saving Option
One of the major reasons ELSS makes a significant investment is its tax-saving feature. Such provisions of the Income Tax Act enable claims of deduction up to ₹1.5 lakh in taxable income every year from different investments, such as ELSS. Such deductions reduce an investor’s taxable income and the taxes payable thereon; hence, this investment is reasonably practical for salaried personnel and professional self-employed individuals, too. The only difference between an ELSS and the other saving options under Section 80C is that ELSS gives out one single advantage: combining tax benefits with the possibility of generating relatively higher returns through investment in equities.
Most investors’ most significant beginning point is the tax-saving component that ELSS tags along. They save on taxes while simultaneously increasing corpus amounts. However, it is essential to note that ELSS’s returns are actually dependent on its equity linkage, thus producing less-than-perfect returns, although there exists some risk. Historically, equity has returned superior results in the longer term, and we now arrive at ELSS’s wealth-creation abilities.
ELSS: a long-term wealth creator
This mainly makes ELSS investment structures different from other tax-saving options. ELSS funds primarily invest in equities, which are shares of companies. The equity exposure offers higher chances for capital appreciation because stocks generally outperform fixed-income instruments over the long term. ELSS thus provides the investor with a relatively rare combination of both tax savings and wealth creation if he has a long-term investment horizon.
Over the years, equity markets have also outperformed most other asset classes, be it fixed deposits, Public Provident Funds, or National Savings Certificates; all these are also popular under Section 80C. Though traditional options provide stability and guaranteed returns, they normally yield less than equity investments. However, ELSS funds, being equity products, offer better returns when held for five to ten years and above.
Lower Lock-In Period to Tame Risk
Another reason to favor ELSS over other Section 80C investment options is the relatively short lock-in period. Under ELSS, the mandatory lock-in is just three years- the shortest tax-saving options available under Section 80C. PPF requires a commitment of 15 years; NSC has five years. The three-year lock-in under ELSS is an attractive feature, especially for investors wanting quicker access to their funds than in other tax-saving instruments.
The lock-in period is just for three years and hence is flexible. This, in return, presents a quicker redemption to the investors so they can withdraw their investments when needed. Although there is a provision to withdraw after three years, it is still recommended that the investor continue for a more extended period to get the power of compounding and hedge the volatility in the market. This flexibility makes ELSS suitable for conservative and aggressive investors looking for a disciplined approach to wealth creation with the added benefit of liquidity.
Compounding and Growth Potential
The concept of compounding is the most powerful process in finance, and ELSS fully utilizes this process over the long term. When investors remain invested in ELSS, the returns accrued on the principal amount are re-invested, creating an effect of compounding over time. Compounding would thus lead to a handsome growth in wealth, especially in equity investments, where returns tend to be higher.
Compounding adds up significantly with constant investment. Many investors prefer investing through SIPs in ELSS, where one can invest a fixed monthly amount. Through SIPs, the investor benefits from rupee cost averaging, wherein the investor buys more units when prices fall and fewer when prices rise. This strategy reduces the average cost per unit over time, which can give better results in a volatile market.
Comparison of ELSS with Other Tax Saving Options:
The benefits of ELSS are better answered when compared with other popular tax-saving instruments. For example, PPF and NSC attract since they have guaranteed returns and are considered safe investments. However, they lack the potential for higher returns since their rates are fixed, thereby not facilitated by market growth. Traditional tax-saving options, like fixed deposits, offer returns that often fail to outrun inflation-justifying another drawback of this option for long-term wealth creation.
ELSS, however, provides investors with the growth option of equity. As it implies market-related risks, too, ELSS funds’ long-term performance has been supportive, as most of the returns generated tend to exceed inflation. Therefore, ELSS gives much better returns than fixed-income products for an investor with a risk appetite like equities.
ELSS Returns at the Time of Taxation
Although ELSS investments are tax-free up to ₹1.5 lakh per annum, the returns from ELSS attract LTCG tax. After the three-year lock-in period, if the investor redeems their ELSS units, any gains made by the ELSS scheme shall be over and above ₹1 lakh in a financial year. In this regard, it would be eligible for a 10% LTCG tax. Despite this, ELSS would remain a better investment than other equity investments, as the deduction benefits at the time of investment due to taxation would be available.
Moreover, the LTCG tax is minimal in most cases, considering the high returns ELSS may yield. Most investors also manage their ELSS investments by redeeming only the required units annually to avoid or minimize the LTCG tax.
Young investors and first-timers will find this scheme suitable
ELSS proves extremely attractive to young investors or even those newly introduced to equity investments. It presents an attractive entry point into equity investments, including all tax benefits and high returns. The three-year lock-in period instils financial discipline and encourages investors to focus on their financial goals.
The young investor has the luxury of time. He can afford to take higher risks and invest in ELSS. Once invested, he can utilize the compounding power, which is both powerful and time-sensitive. For a first-time investor, ELSS helps introduce the dynamics of the stock market, thus increasing financial literacy and strengthening confidence in investing.
ELSS is the only investment option with tax benefits and the potential for colossal wealth creation. The lock-in period for this ELSS is a little shorter, compounding benefits with this equity-based return. This is a good enough choice for investors who accept some market risk in place of higher growth opportunities. Others provide stability but cannot defeat inflation and create wealth on the same line. One of the best choices for investors who want to mix long-term wealth creation with tax savings remains one of the best choices if taken from a long-term perspective.
