Why are ELSS funds better than other tax-saving alternatives?

When it comes to tax saving, many investors find the choice of fund/instrument overwhelming. This is especially true when comparing Equity-Linked Savings Schemes (ELSS) with the other tax-saving alternatives such as tax-saving bank deposits, Public Provident Fund and National Savings Scheme.

While there are several options for saving tax, investing in ELSS makes a relatively better choice. There are numerous reasons to choose ELSS over other tax-saving instruments, such as exposure to equity markets, shortest lock-in period and flexibility while investing. 

This blog aims to outline the benefits of ELSS funds over other tax-saving alternatives in more detail.

1. Better Tax Benefits

One of the key benefits of ELSS tax-saving funds is the fact that they qualify for tax exemptions under 80C of the Income Tax Act, where investments of up to Rs 1.5 lakhs can be claimed as tax deductions every financial year. Apart from this, all capital gains earned through ELSS mutual funds are tax-free, i.e., there is no tax levied on the maturity amount or the earnings, thus making ELSS funds a preferred alternative from the tax-saving perspective.

2. Shorter Lock-in Period

Unlike other tax-saving instruments such as Public Provident Fund or tax-saving bank deposits, ELSS mutual funds have a much shorter lock-in period. For instance, the lock-in period of a PPF and a tax saving FD is 15 and 5 years, respectively, whereas the lock-in period of an ELSS fund is only three years. This makes ELSS funds much more convenient as you can access your funds faster by redeeming them online for either spending or re-investment purposes.

3. ELSS Funds are Inflation-Protected

One of the key advantages of ELSS tax benefits is that they also help you earn returns that can beat inflation. Unlike fixed deposits or bonds, which offer far fewer returns due to inflation, ELSS funds are purely equity-based and give you the benefit of tax-free returns. Also, tax-saving mutual funds provide higher gains than other investment avenues, which are in tandem with the increase in inflation.

4. Not Much Affected by Market Volatility

In comparison to other equity investments, ELSS mutual funds are significantly less volatile, thus making them less prone to being affected by the volatility of the traditional stock market investments.

5. Brings in Financial Discipline through the SIP Route

A Systematic Investment Plan or SIP gives you an option to invest in mutual funds easily by parking a fixed amount every month. In the case of ELSS funds, you enjoy this facility where you can deploy your earnings into your ELSS fund periodically, either weekly or monthly. The most significant advantage of this is less strain on your monthly budget as there is no need to invest a lump sum amount.

6. Long-Term Investment Option

Unlike the general misconception that you need to either withdraw or re-invest your ELSS funds once the lock-in period is over, there is no need for withdrawal or re-investment of ELSS funds if it is performing well. With ELSS funds, you get the choice of remaining invested beyond the lock-in period if you wish to. Choosing a well-diversified scheme is an excellent way to go for long-term investment.  

To Wrap up

The best way to settle ELSS vs the rest of the tax-saving instruments debate is by asking a simple question: Are you willing to take the risk to earn better returns, or would you be okay with predictable returns with nil or zero risk? ELSS funds are an excellent option to consider if you are looking to save taxes while creating wealth at the same time. 

If you want to invest in ELSS tax-saving mutual funds, PGIM, the global investment management business of Prudential Financial, offers some of the best ELSS fund options with professional investment teams to help you reach your financial goals quickly.