While you work hard to earn money, investing that hard-earned money to save tax and earn good returns is one of the mantras of a financially independent future. Taxes tend to eat away at your earnings leaving you with lesser disposable income and further less money to invest. While there are various ways you can save tax in India, ELSS is considered to be one of the best options.

An Equity Linked Savings Scheme (ELSS) can help you in such a scenario. ELSS is a mutual fund equity scheme. This scheme endeavors to offer wealth creation or capital gain over the long-term along with tax benefits under Section 80C of the Income Tax Act, 1961. ELSS also has a mandatory lock-in period of three years

The key features of ELSS are:

• You can invest up to Rs.1.5 lakh at one go or through SIP of as low as Rs. 500 (Systematic Investment Plan) during the financial year which provides a deduction from your gross total income up to Rs.1.5 lakh. (U/S 80C of the Income Tax Act, 1961).
• You can save up to Rs. 46,800* in taxes.
• Long-term capital gains are tax-free up to Rs. 1 lakh. LTCG more than one lakh rupees is taxed at 10% without indexation.
• Different ELSS schemes invest in a diverse selection of stocks. This gives you the flexibility to invest according to your financial goals.
• ELSS offers the shortest lock-in period (3 years) among all the tax-savings schemes under section 80C of the Income Tax Act, 1961.
*Calculated at the highest tax slab rate for FY18-19 applicable on investments u/s 80c. The surcharge has been ignored for ease of calculation.

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What is ELSS?

ELSS: Equity Linked Saving Schemes are pure investment instruments that facilitate investors in equity markets. They save taxes as the investment is exempted under section 80C.

The complete funds are invested in equities or equity-related products and hence, the returns are highly volatile. They are therefore suggested to high-risk tolerant investors. To reduce the risk, an investor can choose the option of SIP (Systematic Investment Plan).

In SIP, the investor regularly invests a fixed amount in equity mutual fund schemes and puts an end to unpleasant market conditions. The funds are automatically invested in the scheme without your efforts. In addition, you get more units when the market is low and fewer units when the market is high. Consequently, the purchase cost is averaged and returns are maximized.

SIP is an investment tool where money starts compounding when investment is done for long periods. Resultantly, you get high returns on regular small investments. At times investors also prefer a ULIP Vs ELSS Vs SIP comparison.

Unlike ULIP, ELSS has a smaller lock-in period of three years. Switching is not allowed in ELSS and the funds can be withdrawn only after a period of three years. 

*This is an investor education initiative to provide important information that you can consume in a short time.