ELSS vs other 80C investments – Why ELSS is the best tax saving option?

Tax season is around the corner, and as an Indian taxpayer, maximising your 80C deductions is a top priority. While traditional options like PPF and bank FDs come to mind, equity-linked savings schemes (ELSS) are increasingly becoming the preferred tax-saving tool. But are ELSS mutual funds truly the best option?

Go through the following article to understand ELSS funds and compare them to other popular 80C investments to make an informed decision.

What are ELSS mutual funds?

Unlike traditional tax-saving instruments that primarily invest in debt, an equity-linked savings scheme or ELSS mutual funds invest most of your money in equities. This means they tap into the dynamic world of stocks, offering the potential for higher returns in the long run compared to fixed-income options. However, just like any equity investment, these funds are open to the inherent risk of market fluctuations.

Investing in ELSS offers two benefits:

• Tax deduction: You can claim up to Rs. 1.5 lakh invested in ELSS as a tax deduction under Section 80C of the Income Tax Act, reducing your taxable income and saving tax.
• Capital appreciation: Over time, the value of your investment in the fund can grow as the underlying stocks increase in price. This potential for wealth creation through market participation sets ELSS apart from other 80C options.

Are ELSS mutual funds better than other Section 80C investments?

This would depend on your risk appetite and financial goals. Let’s compare ELSS with four other popular 80C options:

Public Provident Fund (PPF):

Advantage: Guaranteed returns, safe and secure.

Disadvantage: Long lock-in period (15 years), lower potential returns compared to ELSS.

National Pension System (NPS):

Advantage: Tax benefits beyond 80C, corpus build-up for retirement.

Disadvantage: Very long lock-in period (until retirement), limited investment flexibility.

National Savings Certificate (NSC):

Advantage: Guaranteed returns, good for fixed-income seekers.

Disadvantage: Moderately long lock-in period (5 years), lower potential returns than ELSS.

5-year bank fixed deposit (FD):

Advantage: Guaranteed returns, high liquidity.

Disadvantage: Lower returns than inflation over the long term.

ELSS mutual funds:

Advantages:

• Potentially higher returns: Historically, ELSS has outperformed most other investments that are eligible for Section 80C deductions over long periods.
• Shorter lock-in: Just 3 years, allowing you to access your money sooner.
• Professional management: Experts analyse and invest in promising companies.
• Tax benefits: Claim up to Rs. 1.5 lakh deduction under Section 80C.
• Flexibility: Invest a lumpsum amount or via SIPs, switch between funds within the scheme.

Disadvantages:

• Market volatility: ELSS returns can fluctuate, and you might face losses in the short term.
• Higher risk:Compared to fixed-income options, ELSS carries inherent equity market risks.

Bottom line

While every investment decision needs careful consideration, ELSS presents a powerful opportunity for you. Its potential for long-term growth and tax benefits makes it a strong contender for your 80C investment bucket.

Investing in ELSS is now easier than ever. Most online platforms allow you to invest in ELSS funds with just a few clicks.

Research different schemes, compare performance, and choose one that aligns with your risk profile. Remember, diversification is key, so consider ELSS alongside other investments to build a balanced portfolio.