Why ELSS is Best Tax Saving Investment?

ELSS is best way to save tax and create wealth in long term. Besides, the long term capital gains and dividend earned under ELSS scheme are tax-free. However, an investor should analyse different ELSS schemes before investing based on his needs and risk appetite.

Mar 23, 2017 03:03 IST IIFL

Tax saving is a priority of every salaried/self-employed individual with new financial year around the corner. An investor is eligible for tax deduction up to Rs 1.5 lakh p.a. u/s 80C of the income tax act 1961. ELSS is one of the best ways to save tax and to create wealth in long term. Besides, the long term capital gains and dividend earned under ELSS scheme are tax-free. However, an investor should analyse different ELSS schemes before investing and the preference should be based on his needs and risk appetite.
 
Suppose, if a person has an annual income of Rs 12 lakh. Total tax to be paid will be ~Rs 1.91 lakh. However, if he invests in tax saving scheme u/s 80C, he can save tax of Rs 46,350 (30% tax bracket) and is required to pay ~Rs 1.44 lakh as a total tax.
Particulars Amount
Annual Income Rs 12,00,000
Tax before investing in tax saving scheme u/s 80C Rs 1,90,550*
Tax after investing in tax saving scheme u/s 80C Rs 1,44,200*
Tax saved Rs 46,350
Note: *30% Tax + 3% Cess
 
Some of the benefits of ELSS investment are mentioned below.
Benefits Explanation
Less Lock-in Period ELSS has the shortest lock-in period of 3 years as compared to other tax saving instrument.
Creates Wealth in Long Run Historically, ELSS has given an average return of 12% p.a. Whereas, other instruments such as FDs and PPF have given a return of ~8 to 9 p.a.
Gives Investment Option ELSS offers two investment options - Dividend option and Growth option to investors. In growth option, the dividend is not paid to investor by the ELSS scheme. On the other hand, in Dividend option investors get the dividend whenever declared by the ELSS scheme.
Dividends are Tax-Free In Dividend option, dividends earned are tax-free for customers right from the year of investment. In addition, the long-term capital gains from the investment are also tax-free.

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