Equity linked saving schemes mostly known as ELSS is a mutual fund scheme where your investments are eligible for deductions under 80C of the Income Tax Act. It means your investment can get the benefit of equity appreciation and tax benefits altogether.
As per SEBI, ELSS has to invest at least 80% in equity or equity-related assets.
Currently, the maximum deductions allowed under 80C are 150000. However, each investment made in ELSS is locked in for 3 years from the date of purchase. This means if you buy an ELSS today, you can’t redeem it before 3 years.
Benefits of investing in Equity linked saving schemes
- They are better options for taxpayers who want capital appreciation over the long run and also help them save tax.
- Equity linked saving schemes may deliver better results than traditional tax saving instruments like PPF(which offer fixed interest rates in a particular period of time)
- ELSS schemes are also well diversified across many sectors and stocks, reducing the risk of investments.
- Many ELSS schemes have options to start a fresh investment with as little as 100 rupees.
- You can choose among various ELSS schemes of many AMCs and can invest in more than one scheme while some traditional tax saving options like PPF do not provide such an advantage i.e. you can’t have more than one PPF account against your name.
- ELSS schemes provide you an advantage of stopping investment after the first investment while in PPF you have to make a mandatory contribution per year.
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Disadvantage of Equity Linked Saving Schemes
- Investment in ELSS is subject to market risk like other mutual fund schemes.
- All your investments are locked in for 3 years. You can’t redeem if you have an emergency.
- You can’t get benefits of income tax deductions above 150000 rupees. So, if you have more taxable income you have to look for other options.
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