ELSS: The Wise Choice

Date Published: March 21, 2023

As a young successful professional, Deepak likes to brag about our earnings. But taxes eat into 30% of his income. After taking both taxes and expenses into account, he may be left with very little. He seeks ways to reduce our tax burden and kick-start our savings plan. As a legal way to save money, Income Tax Act allows certain deductions from taxable income that help reduce his tax liability.

A simple calculation of taxes makes Deepak realize that he could save Rs. 46,800 on tax by making the 80C investment amounting to Rs. 1.5 lakh. To avail this deduction, Deepak must invest this amount in any approved investment.

Note: Tax calculations have been made as per Income Tax slabs applicable for AY 2022-23. It is assumed that the assessee has no other income except income from salary. Old Tax regime is used for Income Tax calculation.

While going through various approved options available under section 80C, it is apparent that the same tax benefit applies for each of these options. However, returns, period of lock-in, liquidity differs.

Our elders have traditionally been using fixed income-oriented investment options such PPF or the 5-year bank deposit. They wonder what the big fuss at the end of every financial year is about. They have always looked at this exercise as a year-end ritual and are content that their investments are safe, less complicated and popular.

However, when we take a closer look at the ELSS option, we realise that ELSS actively invests the corpus in the equity market, with a regulatory requirement of atleast 80% of its corpus being invested in equity shares. Equities have the potential to earn higher returns than traditional savings options over the long term.

Did You Know?
If our seniors would have invested Rs.1.5 lakh in ELSS instead of PPF every year for 15 years, this is what they would have made:

• ELSS would have grown to Rs. 63.8 lakh
• PPF would have grown to Rs. 29.8 lakh

Source: Data for the period 01/04/2007 to 31/03/2022

ELSS - Proxied by CRISIL - AMFI ELSS Fund Performance Index,

PPF - www.epfindia.gov.in

This clearly shows how the power of compounding with Equity works wonders for the investor.

Additionally, with the lowest lock-in period of 3 years, ELSS is the only option that offers superior liquidity. Higher earning potential owing to equity investments and a shorter lock-in period are added advantages that could potentially put ELSS on par with other hugely popular investment choices.

Expert Tip:
For those of us who are convinced about benefits of ELSS, but are worried about the risk in Equity, consider this. If we stay invested in equity fund over a longer duration, the risk is considerably lower.

If we stay invested in equity fund over a longer duration, the risk (probability of loss) is considerably lower. As the holding period increases, the probability of making a loss becomes lower. This is where the lock-in period works in our favour. Over the long term, risks in equity investments tend to become lower. Hence, the 3-year lock-in is actually a blessing in disguise!

ELSS need not be isolated for tax benefit. Despite the complex name and the inherent tax benefit that it comes along with, ELSS is diversified equity fund at heart. It is an equity investment which has the potential for wealth creation through compounding and returns that could beat inflation over a long horizon. Therefore, nothing stops Deepak from using ELSS to save for his long term financial goals (such as higher education for kids, retirement, buying a house etc.). So Deepak need not have different silos –one for investments and another for tax saving. His ELSS can double-up as a goal-oriented investment, as a diversified equity fund.

Do not let your 80C allocations go into a traditional tax saving product on an auto-mode. Think before you invest and make a wise choice by investing in an ELSS.

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