Equity Linked Savings Scheme (ELSS): Best for Tax-free Earnings

Millions of people in India look out for ways to save tax, and are often overwhelmed with options like insurance policies, the Public Provident Fund (PPF), and several others. Most of these schemes seem attractive to individuals who are willing to wait longer for returns. For those who wish to save tax and earn good returns within a short period of time, they can be a big turn-off. The individuals who do not want to wait for too long to earn their returns can have the best option in the form of an Equity Linked Savings Scheme (ELSS). It not only helps in getting tax benefits, but also offers them a great chance to profit from the equity markets. It qualifies under Section 80C of the Income Tax Act, 1961, for tax exemption; and at the same time, gives investors the double advantage of tax-savings and value appreciation. An ELSS also carries the following benefits:

Equity growth potential: As it is evident from its name, an Equity Linked Savings Scheme invests a major portion of the fund in equity markets and products associated with it. This increases the earning potential of the investors, as there is a corresponding increase in return with the profit that the fund makes from equity markets.

No tax on dividends: Dividends that investors receive under the ELSS are exempted from income tax. Upon choosing the option of dividends, the ELSS investors get their share of profit earned by the fund on a particular date. They can also prefer the option of dividend reinvestment, in which, the dividends declared are reinvested on the investor's behalf.

Tax exemption on long-term capital gains: If an investor chooses the growth option in ELSS, the Net Asset Value (NAV) of the fund increases with the profit that it earns. The investor does not earn any dividend during the lock-in period of the fund, but he or she can have long-term capital gains that are exempted from tax upon selling the holdings.

Lowest lock-in period: This is a major benefit of an Equity Linked Savings Scheme as compared to the other tax saving schemes. An ELSS has a lock-in period of three years, while it is fifteen years in case of Public Provident Fund (PPF) and six years in case of National Savings Certificate.

While it is true that the returns in ELSS are based on the performance of the equity markets, it also gives the flexibility of monthly investments through Systematic Investment Plan (SIP). A minimum investment specified in the scheme can be made every month on a pre-decided date, which makes it an attractive investment scheme to the small investors. Under the Income Tax Act of 1961, an individual can avail a deduction of up to one lakh rupees from the Gross Total Income for the investment made in an Equity Linked Savings Scheme. Owing to such attractive benefits, the ELSS is gradually becoming a preferred option for investment among many individuals in India, and the numbers are bound to increase in the years to come.