While there are several tax-saving avenues such as National Savings Certificate (NSC), National Pension System (NPS), Public Provident Fund (PPF) and 5-year Bank Fixed Deposits which offer tax benefits under Section 80C of the Income Tax Act, Equity Linked Savings Scheme (ELSS) has proven to be one of the most preferred tax saving options among investors because of its better features. 

Investments in ELSS up to a maximum of Rs 1.5 lakh per annum qualify for income deductions under section 80C of the Income Tax act.

Shorter Lock-in Period:

ELSS schemes have the shortest lock-in period among all the tax-saving investment options. PPF has a lock-in period of 15 years and NPS requires individuals to stay invested until their retirement. But ELSS has a lock-in period of only three years. This allows investors to access their funds in a shorter time frame to meet their short-term requirements.

Higher returns:

ELSS schemes are similar to (Multi-cap Funds) equity mutual funds. They mainly invest in stocks or equity-oriented instruments and the returns generated are comparatively much higher than those of other traditional tax-saving avenues such as PPF, National Savings Certificates and 5-year Bank Fixed Deposits. Equities are the only asset class that can generate inflation-beating returns. 

Most of 80C investments offer returns in single digits on an average – anywhere between 6 to 8%. ELSS has the potential to offer significantly higher double digit returns – since it invests in a portfolio of equity instruments.

Systematic Investment Plan (SIP) facility available:

Investors who do not have a lump sum amount to invest are given a Systematic Investment Plan (SIP) facility in ELSS schemes. This facility allows the investors to invest a fixed amount every month towards the ELSS. 

This will not only instill a financial discipline but also bring down the burden of one time investment. Investing in ELSS funds through SIP mode gives investors the benefit of cost averaging. There is no denying the fact that markets are volatile. The markets can either be bullish or bearish. SIP allows investors to accumulate more units during a bear phase, increasing the value for money.

Better post-tax returns:

Except for PPF and NPS, ELSS offers better post-tax returns than any other 80C investments, because long term capital gains of up to Rs 1 lakh realized in a year from ELSS mutual funds are exempt from income tax and balance long-term capital gains above Rs 1 lakh are taxed only at 10% tax rate.

Ease of investment: 

Investing in ELSS scheme is simple. You can put your money via systematic investment plan (SIP) or as a lump-sum just by a few clicks through your online broking account. You can continue to hold your ELSS units even after the 3-year lock-in period. But in case, you choose to sell them after the 3-year lock-in period, you can do so online in just a few clicks. The funds are credited into your bank account within 3 working days.

How does ELSS compare with other 80C investments?