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Demystifying ELSS: Tax Saving and Wealth Creation

Demystifying ELSS: Tax Saving and Wealth Creation

A good investment portfolio is like a well-maintained garden; it needs constant monitoring and involvement to bloom well. Besides, these depend on time and efforts, consistently. Every investor is looking for the “Top 10 List of Wealth Creation and Tax-saving Schemes” to help achieve their financial goals, especially in times like these.

All Eyes Are On ELSS

Investors often associate inflation-beating stock market returns with wealth creation. It is a known fact that investing directly in the equity market can be stressful for both beginners and risk-averse experienced investors. While mutual funds, can diversify such risks and enable hands-free investment to a limited extent, the Equity Linked Saving Scheme (ELSS) is preferred for its tax-savings feature.

Features of ELSS

But is ELSS tax saving efficient? Let’s take a look at these features:

  • Lock-in Period: ELSS option offers a lock-in period of three years. Further, each SIP matures after its mandatory three years lock-in period, and the ELSS unit-holder is allowed to pause, modify, or stop their SIP anytime. This can give investors flexibility concerning their goal planning. Thus, investors can create their own blueprint towards wealth-building, with comparatively quicker liquidity in the offing.
  • Risk-Return Balance: Equity investments can be directly affected by market volatility. However the ELSS tax savings may have the advantage of market-linked returns and diversified risks.
  • Realise profits or let it add: ELSS offer two plans – Dividend and Growth. You could choose either of them. If you choose the dividend option, you will receive dividends as and when declared by the scheme but do remember that dividend distribution is not assured. Another option is to let it accumulate as part of the scheme, through the Growth option.
  • Annual Deductions: You can invest as little as ₹500 in ELSS. Please make a note that ELSS is an equity-oriented investment with market-linked returns. Further, you can claim a deduction up to ₹1,50,000 under section 80C of the Income Tax Act, 1961 when you file your annual tax returns. However, there is no restriction on investing more than ₹1,50,000. As per Finance Act 2020, resident individuals and HUF have an option to either continue with the existing tax rates or select the alternate tax rates. Investors are advised to consult their tax advisor before investing.

Summing-up

The Covid-19 pandemic has severely affected our economy. To safeguard their interests, investors are more than ever looking for instruments that serve multiple objectives. In such a scenario, the ELSS seems like a viable option.

Although the ELSS is largely perceived as a tax-saving mutual funds scheme, it could also be a keystone to wealth creation for both beginner and experienced investors on account of market-linked returns that offers diversification and flexibility.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully

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