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Equity linked saving schemes are a kind of mutual funds like diversified equity funds with
Tax benefits. It is just like other tax saving instruments like National Savings Certificate and
Public Provident Fund. Main advantage with ELSS is lock-in period is only 3 years while for
NSC it is 6 years and for PPF it is 15 years. At the same time risk factor is high in ELSS.
As per Income Tax act 80c investment up to Rs 1,00,000 are eligible for deduction from the
gross total income hence reducing the total taxable income. For example if your total annual
income is Rs 3,00,000 and you invest Rs 1,00,000 in ELSS then your taxable income will
become Rs 2,00,000.
Previously there was an upper limit for investing in tax saving instruments like ELSS of
5,00,000. Only individuals with less than 5,00,000 annual income are allowed to invest in
tax saving instruments. But last year financial budget removed this restriction and now any
individual can invest in ELSS irrespective of their income level.
Disadvantages of ELSS
Both Equity linked saving scheme and diversified equity scheme operates in same way. Both
are high return and high risk schemes. But there is a 3 year lock in period of ELSS and it
provides tax benefits too.
Best way to invest in ELSS is through Systematic Investment Plan(SIP). With SIP you can
invest a small amount every month for a specific time period. With SIP investor can take
advantage of fluctuations in the stock market. So investor will get more units when the
market is down and get less units when the market is up. For eg if you are investing Rs
1000 every month and you will get 100 units for when Net Asset Value (NAV) is 10 and will
get 50 units when NAV is 20. So investing a fixed sum regularly helps to cover the market
fluctuations by rupee costs averaging. Also most of the Asset Management Companies
(AMC) charges less entry load for SIP compared to normal purchase.
Some advantages of ELSS are
* The 3 year lock in period prevents withdrawals and thus allows your money to
grow over a period of time. Long term investment in equities gives better returns
than any other investment instrument.
* It gives tax benefits (Up to 30% for people in the highest tax slab)
Some ELSS schemes also offer personal accident death cover insurance