Why invest in ELSS Mutual Fund

Income tax payers can claim tax deductions of upto Rs 1.50 lakhs every financial year from their gross taxable income by investing in various schemes under Section 80C of Income Tax Act 1961 including ELSS mutual fund.  The other eligible investment options are Public Provident Funds (PPF), Employees’ Provident Fund (EPF), National Savings Certificates (NSC), Tax Saver FDs, Senior Citizen Savings Schemes (SCSS) and Life insurance premium etc.

Other than ELSS mutual fund investment and life insurance premium, the remaining options offer assured return and thus perceived to be less risky. ELSS invest in equities, do not offer assured return and are subject to market risk; therefore, they are perceived to be risky. But still it is the most attractive option for saving taxes as you can see in the chart below. ELSS funds returns are more than double annualized compared to other options –

Potential of getting higher returns

Tax saving investment options Lock-in period Returns Tax on returns
Bank Tax Saving Fixed Deposits 5 years 5.30-6.00% Taxable
National Saving Certificate (NSC) 5 years 6.80% Taxable
Public Provident Fund (PPF) 15 years 7.10% Tax Free
Equity Linked Saving Scheme category 3 years 14.17% LTCG Tax #

ELSS category average returns as on 6/9/2021 source: Advisorkhoj.com

Tax savings as well as long term wealth creation

While the traditional tax saving investments are perceived to be less risky, therefore, there is a tendency among investors to hold these investments for long term for meeting goals like retirement, children education and marriage etc. However, Equity linked saving schemes is a much be a better tax saving investment option for long term wealth creation as its returns are much higher than other options –

Investment value of Rs 100,000 after 20, 25 and 30 years
Returns Assumption Value of investment Value of investment Value of investment
  after 20 yrs (Rs) after 25 yrs (Rs) after 30 yrs (Rs)
6.00% 3.21 Lakhs 4.29 Lakhs  5.74 Lakhs
7.10% 3.94 Lakhs 5.56 Lakhs 7.82 Lakhs
14.00% 13.74 Lakhs 26.46 Lakhs 50.95 Lakhs

From the above chart you can clearly see that ELSS tax saver funds can be a very good choice for wealth creation purposes over a sufficiently long time horizon.

Returns from ELSS are tax efficient

Investors often ignore the impact of taxes on wealth creation. You must look at returns post tax. Interest paid by most risk-free tax saving schemes eligible under Section 80C are taxed as per the income tax rate of the investor. On a post tax basis, the inflation adjusted return of assured returns schemes is often very low.

ELSS mutual fund on the other hand is among the most tax efficient investments as gain upto Rs 1 lakh in is tax free in a FY. Thereafter it is taxed at 10% only like any other equity mutual fund scheme.

Liquidity ELSS mutual funds in India has the least lock-in period of 3 years which makes it the most liquid investment among various tax saving options.

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