According to financial planners, ELSS category has the potential to offer double-digit returns over a long period, whereas other options available for tax saving mostly offer single-digit returns.
Of late Equity-linked savings scheme or ELSS has gained significance as a tax-saving product for its high return generating potential. With Indian equity markets trading near all-time highs, these products have delivered promising returns. According to mutual fund research website valueresearchonline.com, ELSS schemes on an average have delivered a 5-year CAGR of around 11% while 3-year CAGR of these funds are at 14% as on January 3, 2019. Tax saving fixed deposits on the other hand offer up to 6.5% interest
According to financial planners, ELSS category has the potential to offer double-digit returns over a long period, whereas other options available for tax saving under section 80C mostly offer single-digit returns.
Here are few advantages which ELSS offers over tax-saving fixed deposits:
Lock-in period: All tax-saving investments come with a lock-in period before which you cannot withdraw your investment. ELSS funds have the lowest lock-in period of 3 years. Tax-saving fixed deposits, on the other hand, have a lock-in of five years. Also, one can not take a loan against these FDs.
Tax benefit: Interest earned on a tax-saving fixed deposit gets added to the annual income of the taxpayer and is taxed as per his income tax slab. However, in case of ELSS, returns booked over Rs 1 lakh in a particular financial year are taxable at 10%. In Budget 2018, the government introduced long-term capital gains tax of 10% on gains booked from equity and equity mutual funds if the amount of gain crosses Rs 1 lakh in a financial year. This is applicable to ELSS as well.
Higher Return: So far as returns are concerned, ELSS is the best among all other tax-saving options available as they invest in equity or equity-related instruments. Historically ELSS funds have delivered returns between 12-16% over the long term, which is much higher compared to fixed deposits and other tax-saving products like PPF, EPF, NPS.
However, ELSS returns are market-linked and may turn negative in case of prolonged correction in equity markets. But if one stays invested for long-term then chances of negative returns recede.
KEY HIGHLIGHTS
- ELSS schemes on an average have delivered a 5-year CAGR of around 11% while 3-year CAGR of these funds are at 14% as on January 3, 2019.
- ELSS funds have the lowest lock-in period of 3 years. Tax-saving fixed deposits, on the other hand, have a lock-in of five years.
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