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ELSS vs Other Tax Saving Options

While other investment options provide tax benefits, ELSS has several benefits that give it an edge over them

With the advent of the new financial year, taxpayers can finally heave a sigh of relief after having gone through all the trouble of investing throughout the last month to claim deductions under various heads of income tax . There is an exhaustive range of tax saving instruments like ELSS Mutual Funds, PPF, NSC, NPS, 5-Year FDs etc. which people prefer to invest in.

Majority of the people start investing at the last moment when the deadline starts approaching even though this is an unavoidable task every financial year. Because of the last-minute rush and confusion, they are not able to think with a clear head about whether the tax benefits from their investments outweigh the opportunity cost they might be incurring.

An ELSS is an investment that is most sensible for the majority of people as not only does it exposes them to stocks that have a proven track record of outperforming every other asset class in the long run but also has the shortest lock-in period as compared to other tax-saving avenues. Apart from this, long term capital gains of upto 1 lakh are exempted from income tax, and gains above 1 lakh are taxed at 10%.  

The aforementioned benefits make ELSS mutual funds ideal for beginner investors who, after experiencing the flavor of equity investments, can then consider other categories as well.

Short-term equity investments carry a higher risk. But in the longer run, there is a significant reduction in the associated risk. The lock-in period ensures that the investors stay invested for atleast 3 years and thus inculcates the needed discipline of staying invested for the long term. Another advantage of a lock-in period is that the fund manager gets more flexibility to invest without concern for redemptions which, in turn, puts him/her in a position to build strong positions in various stocks and maximize potential gains while keeping less cash on hand.

The best approach to invest in an ELSS is through monthly Systematic Investment Plans (SIPs) throughout the year, just like with all equity investments. SIPs have two benefits in this situation: first, they safeguard your assets during a market slump, and second, you can avoid the last-moment rush.

Note: Investment in ELSS is subject to the lock-in period of 3 years from the date of allotment of units.