As the March 31 deadline to make tax-free investments looms closer, investors are contemplating to invest in a slew of instruments. One such instrument is Equity Linked Savings Scheme (ELSS) that offers tax benefit under Section 80C.
This financial instrument falls under the category of equity funds. It is distinct from other tax-free investments in a number of ways including its shorter lock-in period of three years.
In other words, funds locked in ELSS funds cannot be withdrawn for a minimum period of three years.
What is equity linked savings scheme (ELSS)?
Equity-linked savings schemes represent a category of mutual funds that enable investors to claim tax deductions under Section 80C of Income Tax Act, 1961. These schemes invest primarily in equity and equity-linked financial securities.
By investing in ELSS, one can claim tax exemption of up to ₹1.5 lakh. It is worth mentioning that this cap of ₹1.5 lakh includes the sum total of all investments made that are eligible for exemption under section 80C such as PPF, NPS and NSC, LIC, among others.
There are a total of 42 ELSS schemes with combined net assets under management (AUMs) of ₹1,49,998 crore as on Feb 28, 2023. A year ago, this category had a total of 40 schemes and the total assets under management (AUMs) of ₹1,41,035 crore as on Feb 28, 2022, shows the AMFI data.
Experts suggest that investing in ELSS can enable investors to meet financial goals while saving income tax at the same time. Another key advantage of ELSS is that unlike other tax saving instruments such as NPS and PPF, ELSS has a shorter lock-in period i.e., three years.
Viral Bhatt, Founder, Money Mantra said, “ELSS funds are helpful for both immediate and long-term objectives. ELSS funds have a shorter lock-in period of three years, and investments are eligible for tax deductions under section 80C.”
If you look at the past returns of equity linked savings schemes (ELSS), you will discover that the top-performing schemes have given a CAGR return of anywhere between 12-19 percent per annum.
|Quant Tax Plan||19.96|
|Canara Robeco Equity Tax Saver Fund||13.70|
|Mirae Asset Tax Saver Fund||13.00|
|Bank of India Tax Advantage Fund||12.07|
|Kotak Tax Saver Fund||12.49|
(Source: AMFI; Regular returns as on March 15, 2023)
As one can see in the table below, Quant Tax Plan gave a CAGR return of 19.96 percent per annum, Canara Robeco Equity Tax Saver Fund gave a return of 13.70 per cent, Mirae Asset Tax Saver Fund gave a return of 13 percent, Bank of India Tax Advantage Fund gave 12.07 percent and Kotak Tax Saver Fund gave a return of 12.49 percent.