The benefits and drawbacks of ELSS funds explained

ELSS funds

ELSS stands for equity enabled schemes soaring in popularity for the last few years. But with the alarming levels of popularity a lot of negative information has flooded the internet. Before planning to opt for the best tax saving ELSS funds you need to be aware of the benefits and risks of both. The major advantage of ELSS over other tax saving instrument as compared to the NPS is a short lock in period of 3 years. For example a NPS has a lock in period of 20 years. These funds are equity oriented and in the long run better results are assured. There are some positives along with negatives associated with investing in ELSS funds

ELSS funds

Lucrative and tax efficient

ELSS funds are rated to be among the tax saving instruments.  As per section 80 C of the Income tax act you can claim a rebate of 1.5 lakhs. You can invest more than the desired amount in such schemes but you are entitled to a discount of 1.5 lakhs. They allow you to save tax and at the same time provide higher equities through return in the long run.

Tax rates on the lower side

As seen ELSS funds have a shorter lock in period of 3 years. Any returns that you derive from ELSS would be taken in the form of long term capital gains. Unlike the short term capital gains that are taxed at 15 % any long term capital gains about 1 lakh is taxed at a mere 10 %. For this reason ELSS funds attract lower tax rates.

Smaller locker in period

The substitutes to ELSS have a lock in period of 5 years. On the other funds like PFF have a lock in period of 15 years? Till retirement NPS schemes are valid. At the same time ELSS in spite of having the shortest lock in period provide maximum returns

Investing via SIP

Systematic investment via SIP is the perfect way to foster discipline. You should learn to invest and cash in on the power of compounding.


Tax benefits at a limited level

As per section 80 C of the Income tax act you are entitled to a deduction of 1.5 lakh. This would be in specific avenues. This would be inclusive in relation to all other investments of the taxpayer. Say for example a taxpayer has already touched upon the benefit under section 80 C; they cannot go on to claim other benefits.

To conclude equity based funds are a good model for investors who want to earn higher returns while investing in stock markets. In spite of the returns being good, you are entitled to a tax benefit of 1.5 lakhs. In case if you are nearing the limit of 1.5 lakh it does not make sense to invest in ELSS funds. For the purpose of saving tax it would not suffice. But still they offer a reasonable return on investment which in the eyes of investors seems lucrative.