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Equity linked savings schemes (ELSS) are mutual fund investments that also provide tax savings. ELSS funds are invested entirely into the equity markets, thereby providing good opportunities for growth. However, ELSS schemes also carry the risks associated with the equity market, and there's no guarantee of any fixed returns.
You can get tax benefits of up to ₹150,000 per year by investing in the various ELSS schemes. You don't have to pay tax on any dividends earned through ELSS investments. Also, there's no tax on withdrawal of ELSS investments. Among all the tax-saving options, ELSS has the potential to generate maximum returns.
ELSS investments have a lock-in period of 3 years, so you cannot withdraw money until that time. When you compare with other tax-saving instruments, the lock-in period of ELSS is the lowest. After three years, you can continue to stay invested as ELSS doesn't have an expiry period.
You can invest in ELSS either as a lump sum or through a Systematic Investment Plan (SIP). If you choose a SIP option, a fixed amount will be deducted automatically from your bank every month towards ELSS. You can set a SIP for as low as ₹500. Note, that with a SIP option each monthly instalment will have a separate lock-in period of 3 years.
ELSS is more suited for investors in the early- or mid-career stage as they will have enough time to make a decent return irrespective of short-term market fluctuations. ELSS is not ideal for people about to retire as typically their priority is the safety of their capital and stable returns.
You should select an ELSS scheme based on the returns generated over a period of 3- to 5-years. Also check the track record of price fluctuations. You should opt for funds that offer a balance of high returns and stability.
Reliance Tax Saver ELSS scheme has provided a return of 20.8 per cent over a five-year period and a return of 30.5 per cent over 3 years. For the quarter ended March 2014, the scheme holds the number 1 rank among all ELSS schemes, as per CRISIL, a top rating agency. Minimum investment is ₹500. The scheme has been in operation since March 2005. The scheme's investment portfolio comprises of a mix of automotive, engineering, cement, banking/finance, pharmaceuticals, retail, and real estate companies.
Use our tax calculator to check the impact of ELSS investments on your tax payable.