As the month of March unfolds and the financial year inches towards its closure, taxpayers across the nation are diligently exploring avenues to optimize their tax-saving strategies. There are various options available for the same like ELSS, Public Provident Fund (PPF), National Pension System (NPS), and Tax Saving Fixed Deposits (FDs), etc.

ELSS, a category of mutual funds, not only offers the dual benefits of tax exemption under Section 80C of the Income Tax Act, 1961 but also holds the potential for long-term wealth creation through investments in equities. As it mostly invests in equities & can beat inflation, will provide better return than other investment instruments. ELSS as a tax saving tool helps to achieve up to 5-6 times corpus as compared to other options over the career span.

Let’s get deeper into what ELSS entails, its benefits, and how it can potentially unlock wealth growth for investors.

What are Equity Linked Saving Scheme (ELSS?)

ELSS is a type of mutual fund scheme that primarily invests in equity and equity-related instruments. What sets ELSS apart from other tax-saving instruments like PPF (Public Provident Fund) and NSC (National Savings Certificate) is its higher exposure to equities, which potentially offers superior returns over the long term. ELSS comes with a lock-in period of three years, during which investors cannot redeem their investment.

Comparison of ELSS & Tax saving investment alternatives:

For an Example

– NPS or PPF investment of ₹1 lakh growing at a 8% annual rate for 25 years would reach approximately ₹6.84 lakh, whereas the same investment in a 7.1% NSC instrument would amount to around ₹5.55 lakh.

– Let’s assume an investor Mr. Gupta invests in ELSS Scheme, Mr. Gupta plans on investing Rs.1 lakh in an ELSS. The average expected returns from it is around 13%. After 25 years, he will receive Rs.21.23 lakhs.

Mr. Gupta can also opt for SIP route while investing in ELSS. Say, Mr. Gupta starts   with SIP of ₹10,000, then at the end of 25 years, he would have  of corpus of at least Rs.2.27 crores.

Below mentioned are the two examples of how SIP in some of the ELSS schemes would have performed as compared to other avenues over the last 25 years.

From the above chart we can say that ELSS based schemes have clearly outperformed other avenues in the terms of returns over the 25-year period of time.

Snap shot of few ELSS Schemes performances:

From the above table, it is evident that ELSS Mutual Fund Scheme have performed good in the longer run. All of the tax saving mutual fund schemes mentioned above had given returns over 14% in different time horizons.

Hence, we can say that investing in the Tax saving scheme can benefit investors from gaining more returns other than any investment instrument & can also get benefit of income tax deduction Under Sec 80C.

Key features of ELSS:

– ELSS comes with the minimum lock in period of 3 years.

– It invests at least 80% in equities.

– ELSS funds typically invest in diverse equities from various sectors, thereby decreasing concentration risks.

– Investing through SIP will provide support in averaging cost of investment & benefitting the power of compounding.  

Who Should Invest in ELSS Scheme?

– Salaried Individuals: If you are a salaried employee, you would likely be contributing towards the Employees’ Provident Fund (EPF), which is a fixed-income product. If one wants to generate higher returns on one’s investment portfolio, then ELSS is a suitable option. 

– First-time investors: If you are a new investor ELSS is an ideal choice, since, in addition to tax benefits, you get a flavour of equity investing and mutual funds. Yes, equity investments do carry a higher risk, but that is generally over the short term due to the volatility in the market. If you invest for long term i.e. for 5 year the risk is much lower.

The best way to start investing in an ELSS is through monthly SIPs. SIPs in an ELSS fund help you accumulate more units when the market is in the red and generate good returns when the markets were favourable.

Conclusion:

Equity Linked Savings Scheme (ELSS) presents an opportunity for investors to not only save taxes but also harness the wealth creation potential of equities. By aligning tax-saving objectives with long-term wealth accumulation goals, investors can benefit from the power of compounding and capitalize on India’s growth story. ELSS can serve as a cornerstone in building a robust investment portfolio geared towards achieving financial prosperity.

We at RichVik Wealth, enable ELSS investments for our clients and help them with tax efficient wealth accumulation.

To understand more on the topic as well as to start investments please feel free to contact us:

Phone: +91-9324609115

E-mail: team@richvikwealth.in

The article is authored by Mr. Saurabh Gosavi from Team RichVik.