ELSS Funds: One of the better tax saving options under Section 80C

Section 80C of the Income Tax Act, 1961 of India identifies specific expenses and investments eligible for exemption from Income Tax. While there are several tax saving instruments available in the Indian market place, one should consider comparing the same on the following parameters:
• Liquidity
• Risk to capital
• Return generation potential
• Tax benefits during investment and the treatment of withdrawals

We have compared tax savings instruments on the basis of these parameters in the table below:

Source: SBI.org.in, Indiapost.gov.in, NSDL, Ace MF

The ELSS stands out as a popular tax-saving investment option, under section 80C of the Income Tax Act, 1961 allowing investors to claim a deduction of up to ₹1.5 lakh# in a financial year. It offers a dual benefit of potential wealth creation and income tax savings.

Key Features:
Shorter Lock-In Period: ELSS comes with a lock-in period of three years, which is relatively shorter compared to other tax-saving instruments like Public Provident Fund (PPF) or National Savings Certificate (NSC). Further, ELSS offers provision of complete withdrawal after the short lock-in period. In comparison to this, other instruments have provisions for partial withdrawal, till the time their longer lock in periods are completed.

Wealth Creation: Beyond tax savings, ELSS provides an opportunity for wealth creation over the long term, given that it provides access to the equity markets. The inherent structure of the product, which allows it to search for opportunities across the market cap spectrum, allows the fund manager to back his best ideas without any limitation in terms of sectors or market cap.

ELSS not only serves as an effective tax-saving tool but also offers the potential for higher returns compared to traditional tax-saving instruments. However, it’s crucial for investors to assess their risk tolerance and investment goals before choosing ELSS or any other financial instrument.

#As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab.

Finance Act, 2020 announced a new tax regime giving taxpayers an option to pay taxes at a concessional rate (new slab rates) from FY 2020-21 onwards. Any individual/ HUF opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions. Since, individuals/ HUF opting for the new tax regime are not eligible for Chapter VI-A deductions, the investment in ELSS Funds cannot be claimed as deduction from the total income.

The author is Chief Business Officer, JM Financial Asset Management. Views are personal.

Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.