As the financial year draws to a close on March 31, taxpayers are focusing on maximising their savings through investments under Section 80C of the Income Tax Act. Among the various options available, Equity Linked Savings Schemes (ELSS) stand out as a favourable choice for both tax savings and potential long-term wealth creation.
Under Section 80C, investors can claim deductions up to Rs 1.5 lakh per annum, providing a lucrative pathway to reduce taxable income while investing in promising financial instruments. ELSS funds, by investing in equities, have historically delivered returns in the range of 13-14% annually over three to five-year periods, albeit with inherent market risks.
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Investing in ELSS funds, while offering significant potential for returns, also involves exposure to stock market volatility. It is crucial for first-time equity investors to understand that unlike traditional instruments such as the Public Provident Fund (PPF) or National Savings Certificate (NSC), ELSS funds do not guarantee returns and could incur losses in unfavourable market conditions. Despite these risks, many investors are drawn to ELSS funds due to their relatively short lock-in period of three years, the shortest among tax-saving investments under Section 80C. This feature, along with the potential for high returns, makes ELSS a compelling entry point for stock market investments.
Among the seven top-performing ELSS schemes, the Quant ELSS Tax Saver Fund leads with a five-year return of 32.51%, followed by SBI Long Term Equity Fund at 26.08%. Other notable performers include Parag Parikh ELSS Tax Saver Fund and HDFC ELSS Tax Saver Fund, with returns of 24.93% and 24.20% respectively. Despite their high-risk ratings, these funds attract investors seeking higher returns over time, as their performance data suggests potential for capital appreciation. Investors, however, need to weigh the risks carefully, especially in volatile markets, before committing to ELSS investments.
In comparison, traditional government-backed investment options such as the PPF and NSC have much longer lock-in periods, with the PPF requiring a 15-year commitment and NSC requiring five years. These alternatives, while safer, typically offer lower returns than ELSS funds. For instance, over a 10-year span, the ELSS category has provided an average return of around 11.89%, underscoring their potential as a high-return investment vehicle. The shorter lock-in period of ELSS funds not only attracts new investors but also allows them to navigate through market fluctuations over time.
Ultimately, ELSS funds offer a blend of tax efficiency and growth potential, which is crucial for investors looking to optimise their tax liabilities before the financial year ends. The mandatory three-year lock-in period grants investors the opportunity to withstand market volatility and aim for higher returns in the long run. With the tax deadline approaching, taxpayers should consider evaluating these schemes for their portfolios, balancing the risk with potential rewards. As ELSS funds continue to deliver noteworthy returns, they remain a strategic investment choice in the diverse basket of Section 80C options.