Every year in March, all responsible citizens of the country buckle up and start calculating their income tax so that they can pay it before the deadline. And most people, after paying the taxes, decide to use some tax-saving financial instruments to reduce their tax liabilities next year. There are several tax-saving investments like the Public Provident Fund being or PPF, life insurance policy, etc. However, if you want to the dual benefits of tax deduction and valuable returns on investment, the best investment option is the ELSS or the Equity Linked Savings Scheme.
An Equity Linked Savings Scheme is a tax-saving mutual fund scheme that invests predominantly in equity-related investment instruments. A tax-saving mutual fund scheme like ELSS has the shortest lock-in period of just three years. This makes ELSS one of the best ways to save taxes as well as create wealth over the long term.
Several investors opt for ELSS funds because, unlike regular mutual funds, the investments made for ELSS are tax-deductible up to Rs. 1.5 Lakh per year under Section 80C of the Income Tax Act. This means that your taxable income can be reduced based on the amount you invest in ELSS, which in turn will reduce your income tax.
Apart from that, after the lock-in period of 3 years, your maturity amount or the amount earned by your ELSS is tax exempted if it is equal to or below Rs. 1 Lakh. If it is more than that, then a Long Term Capital Gains Tax of 10% is applicable.
This way, you can pay lower taxes using ELSS and save up on your hard-earned money.
As many seasoned investors will tell you, staying invested for longer times is the best way to accumulate wealth. The longer duration means that your investment will be safe from market volatility which occurs over short periods. And even though ELSS has a short lock-in period of 3 years, it is always advisable to your money invested for as long as possible for high returns. As compared to other tax-saving funds, ELSS can give you significantly better returns over the long term.
The Equity Linked Savings Scheme is probably one of the best tools for creating a sizable corpus over the long term. And the reason for that is threefold. One, since 80% of ELSS tax saving funds are invested in equity, they have a higher potential to generate good returns. Because the equity market, despite having certain risks, can grow exponentially if the market is in an upswing. Secondly, it is known that long term mutual fund investment is bound to earn you healthy returns. Finally, the tax-saving aspect of ELSS means you can save your money on taxes and that will have a significant contribution to your wealth.
Therefore, it is evident that ELSS is one of the best ways to create wealth as well as save taxes.