ELSS vs other Tax Saving Options under 80C

There are several provisions u/s 80C of the Income-Tax Act, 1961(I-T Act) that provide a taxpayer deduction of up to ₹ 1.5 lakh from taxable income under the Old Income Tax Regime. Equity Linked Saving Scheme (ELSS) is one such investment option that generates handsome returns over a long period. In this article, we will learn more about ELSS vs other tax saving options under section 80C I-T Act, 1961.

Section 80C of the I-T Act, 1961

Saving taxes is of utmost priority among Indians and motivates people to invest to save the maximum possible taxes. Apart from investments, expenses like tuition fees paid for up to 2 children, repayment of home loan interest, employee’s contribution to EPF, etc are also eligible for deduction u/s 80C under the Old Income Tax Regime.

Some of the investment options under the section are Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), Unit Linked Insurance Scheme (ULIP), Life Insurance, Fixed Deposit (FD) for 5 years or more, National Savings Certificate (NSC), Senior Citizen Savings Scheme (SCSS), etc.

Equity Linked Saving Scheme (ELSS)

 Equity-linked savings schemes or ELSS, are equity-oriented mutual funds that invest a major portion of their corpus into equity or equity-related instruments. They come with a mandatory lock-in period of 3 years. ELSS funds are also called tax saving schemes as they offer exemptions up to ₹ 1,50,000 under section 80C of the I-T act, 1961.

Features of ELSS

• Lock-in period

ELSS is a category of Mutual Fund schemes that has a lock-in period of 3 years and is eligible for tax deductions u/s 80C of the I-T Act. While there is no restriction on maximum investments, the tax benefit is allowed only on investments of up to Rs 1.5 lakh in a financial year.

• Taxation

Apart from the tax benefit on investment, ELSS has a low long-term capital gain tax rate of 10% only and that too on gains exceeding Rs 1 lakh in a financial year, when the fund is redeemed, and dividend received is tax-free in the hands of the investor. 

• Risk

ELSS is considered a high-risk investment as the majority of the investment portfolio consists of equities or equity-related investments at any point in time, which may be increased to 100%, depending on market situations. So, investments in ELSS should be made for the fulfilment of long-term financial goals only.

• Option to invest in Systematic Investment best Plan (SIP)

An investor can minimise investment risk by avoiding lump-sum investment and using a systematic investment plan (SIP) to invest smaller amounts in ELSS periodically. This is because, in the case of lump sum investment, an investor would gain only when the market goes further up and the net asset value (NAV) of the fund increases. On the other hand, in the case of investment through SIP, the same amount will be invested every month. As the market fluctuates, some of the SIP money will get invested at a higher market level and some at a lower market level. At a higher market level, the fund value would be high, but the investment would fetch lower units, while at a lower market level, an investor would get higher units even as there will be a decrease in the fund value considering the same SIP amount. Higher units would magnify the gains when the market goes up and NAV increases.

• Return

While the risks associated with the investments in ELSS are high especially during the short term, it has the capacity of delivering a long-term return much superior to other tax-saving investments, which would help an investor beat the inflation comprehensively, provided the investor remains invested during high and low market cycles.

Comparison between ELSS and other tax-saving options under section 80C of the I-T Act, 1961

Equity Linked Saving Scheme (ELSS) Vs Public Provident Fund (PPF)

Equity Linked Saving Scheme (ELSS) Vs Sukanya Samriddhi Yojana(SSY)

Equity Linked Saving Scheme (ELSS) vs Unit Linked Investment Plan (ULIP)

Equity Linked Saving Scheme (ELSS) vs Life Insurance Policy(LIC)

• Equity Linked Saving Scheme (ELSS) vs National Saving Certificate (NSC)

• Equity Linked Saving Scheme (ELSS) vs Senior Citizen Savings Scheme (SCSS)

Final Thoughts

As ELSS is an equity-oriented investment option, among tax-saving investment options available u/s 80C of the IT-Act, it is considered one of the riskiest investment options. Although ELSS investments are subject to market risks, especially in the short term, it has the capability of delivering a much superior return than the other 80C investment options in the long term. The ideal way to invest in ELSS is through SIP.

Frequently Asked Questions (FAQs)