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.
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.
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.
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)
|Investment Risks||It bears the stock market risk||It comes with a sovereign guarantee, hence these investments are risk-free.|
|Return||Returns can be unstable as these are linked to the market. But in the long term, the returns can become stable at a range higher than that of fixed-return instruments.||The rate of interest on PPF is declared quarterly by the government and doesn’t fluctuate much. Currently, the interest rate is 7.1% per annum.|
|Lock-in Period||The Lock-in Period in ELSS is 3 years.||The maturity period of PPF is 15 years. However, loans against PPF may be taken from the third to sixth year and partial withdrawals are allowed from the seventh year onwards.|
|Taxation||It is eligible for deduction u/s 80C. A capital gain tax rate of 10% is charged on gains exceeding Rs 1 lakh in the financial year when ELSS is redeemed.||The interest and maturity amounts of PPF are completely tax-free.|
Equity Linked Saving Scheme (ELSS) Vs Sukanya Samriddhi Yojana(SSY)
|Risk||It bears the stock market risk||It comes with a sovereign guarantee, hence these are investment risk-free.|
|Lock-in period||ELSS has the shortest lock-in period of just 3 years.||A girl may partially withdraw money after she becomes 18 years old for study purposes. An account matures when the beneficiary girl becomes 25 years old. However, she may withdraw the entire money and close the account if she gets married before 25 years of age.|
|Return||Returns can be unstable in the short term as these are linked to stock markets. However, the prospect of getting higher returns increases with the increase in investment duration.||The interest rate is similar to PPF (which currently is 7.6% compounded annually)|
|Taxation||It is eligible for deduction u/s 80C. At the time of redemption of the investments in ELSS, 10% capital gain tax is charged on gains exceeding Rs 1 lakh in the financial year.||The interest and maturity amount of SSY are completely tax-free.|
Equity Linked Saving Scheme (ELSS) vs Unit Linked Investment Plan (ULIP)
|Investment Risks||It bears the stock market risk||Investors have the option to choose the level of equity exposure. The higher the equity, the higher will be the investment risks. Risks reduce if an investor moves toward the debt category.|
|Return||Higher equity exposure increases short-term risks, while the prospect of getting a higher long-term return is also high.||Returns are linked with the market hence, can vary accordingly.|
|Lock-in Period||It has a lock-in period of 3 years.||It has a lock-in period of 5 years.|
|Taxation||It is eligible for deduction u/s 80C. 10% capital gain tax is charged on gains exceeding Rs 1 lakh in the financial year when ELSS is redeemed||The maturity/surrender value shall be exempted from tax under Section 10(10D), where an aggregate of the amount of the ULIP premium payable does not exceed Rs 2.5 lakh for any of the financial years during their term.|
Equity Linked Saving Scheme (ELSS) vs Life Insurance Policy(LIC)
|Risk||The ELSS investments are subject to market risks.||Life Insurance policy is a safe option for Investment|
|Lock-in period||The lock-in period for ELSS is 3- years.||There is no specific lock-in period|
|Return||Returns can be unstable – especially in the short term – as these are linked to the market. Stability and prospect of getting higher returns increase with the increase in the investment period.||You can get a return on a Life insurance policy either on the policy’s maturity or on the policyholder’s death.|
|Taxation||It is eligible for deduction u/s 80C. 10% capital gain tax is charged on gains exceeding Rs 1 lakh in the financial year when ELSS is redeemed||The amount received on maturity of the life insurance policy is tax-free|
- Equity Linked Saving Scheme (ELSS) vs National Saving Certificate (NSC)
|Risk||It bears the risk associated with stock market investments.||National Saving Certificate is a safe and stable investment option.|
|Lock-in period||ELSS has a lower lock-in period of 3 years.||The lock-in period for NSC is 5 years.|
|Return||Returns are not fixed and fluctuate with market fluctuations, especially in the short term. The prospect of getting a superior return brightens with the increase in the period of investment.||The government declares the rate of interest on NSC on a quarterly basis. The current rate is 6.8%|
|Taxation||It is eligible for deduction u/s 80C. A 10% capital gain tax is charged on gains exceeding Rs 1 lakh in the financial year when ELSS is redeemed||Interests on NSCs are taxable in the hands of a taxpayer. While filing their ITR, taxpayers need to declare the interests earned on an accrual basis under the head Income from Other Sources during the investment period|
- Equity Linked Saving Scheme (ELSS) vs Senior Citizen Savings Scheme (SCSS)
|Risk||It bears the market risk||SCSS does not fluctuate with the fluctuations in stock markets, hence is a safe option of Investment.|
|Lock-in period||ELSS has a lock-in period of 3 years||Lock-in period for SCSS is 5 years|
|Return||As these are market-linked instruments, returns may fluctuate in the short term, and gradually stabilise with the increase in the investment period.||The current interest rate applicable to SCSS is 8% per annum. This interest rate is applicable from 1 January 2023 until 31 March 2023.|
|Taxation||It is eligible for deduction u/s 80C. 10% capital gain tax is charged on gains exceeding Rs 1 lakh in the financial year when ELSS is redeemed||Interest on SCSS is taxable as per the tax slab applicable to the person. In case the interest amount earned is more than ₹ 50,000 for a fiscal year, tax deducted at source (TDS) is applicable to the interest earned.|
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)
How risky is ELSS investment?
ELSS investments are mutual fund investments in which a major corpus is of equity or equity-oriented funds and hence they are subject to market risks, especially in the short term. However, factors like the management of portfolios by professional fund managers, reducing the impact of market fluctuations over time, etc keep the risks under control. So, by taking calculated risks and making investments through SIP instead of lump sum investments, one may get a superior long-term return.
What is the investment period in ELSS?
There is no fixed investment period. You may invest in ELSS for as long as you want. However, there is a lock-in period of 3 years. So, you can’t redeem an investment before the completion of 3 years from the date of investment.
Can I redeem my entire investment after 3 years?
You should decide to redeem depending on the market situation. If the market is up and NAV is high, you may go for redemption. However, every investment has a separate lock-in period of three years. So, in case of investment through monthly SIP, units purchased through the first instalment will be free for redemption after 3 years from the date of starting of the SIP. Subsequent instalments will become free once the respective units purchased complete 3 years from the date of respective investments.
Who should invest in ELSS
ELSS works very well for the salaried individual. It’s also suitable for those who are open to short-term risk and can stay invested for a long time for better returns.