If you are looking to save tax, then why not do it in a way that helps you create long term wealth too. For this purpose, an equity-linked savings scheme or ELSS is an easy choice. Not only does ELSS help you create wealth by investing in equity assets but also it qualifies for a tax deduction for an investment up to Rs 1,50,000 in a financial year.
ELSS comes with a three-year lock-in, after which you are free to redeem a few or all units. However, this is an equity investment and the longer you are able to remain invested the better it is for your wealth creation goal.
There are other investment avenues which can help you save a similar amount of tax, however, when you look at performance, none of the others has delivered similar inflation plus returns in the long run.
Before you pick your ELSS scheme, here are some additional aspects you need to know.
1. You can do a systematic investment
Being on the mutual fund platform means that you invest smaller amounts every month and claim a tax deduction on the accumulated investment in the financial year. This saves you from putting aside a lump sum at the end of the year. Thereby, easing the pressure through small instalments. Be mindful that each monthly investment will have a different lock-in period.
2. Tax-free gains up to Rs 1 Lakh
When you invest in ELSS not only will you get a tax deduction on the investment amount, but also long term capital gains on the first Rs 1 lakh worth of gains is nil. In other words, you will pay long term capital gains tax only gains beyond Rs 1 lakh.
3. You can hold beyond three years
The three-year lock-in period is more a suggestion for you to remain invested for the long term. Once the lock-in is over, you have the flexibility to withdraw or redeem form the fund. Having said that, it is in your interest to remain invested for at least 5-10 years rather than redeeming immediately after the lock-in is over. Unless there is a performance issue or a fund manager issue don’t redeem your ELSS funds even after the lock-in is over, hold on for the long term.
ELSS is one of the simplest, most convenient, transparent and remunerative (in the long term) tax-saving investments. With the convenience of monthly investing, you should take up the opportunity it gives to not only save taxes but also build wealth.