Equity-linked savings scheme (ELSS)

ELSS or equity-linked savings schemes are equity funds which are designed to offer tax benefits under section 80C of the Income Tax Act. ELSS provides you with high returns compared to fixed deposits and public provident funds because they primarily invest in equity. They come with a low lock-in period of 3 years compared to other tax-saver investments. The three-year lock-in period qualifies for a tax exemption under section 80C of the Income Tax Act which allows maximum tax exemption of ₹. 1,50,000. ELSS offers returns between 12-18% compared to other tax saver investments, however, the returns are subject to long-term capital gains tax at 10%.

When investing in ELSS it is important one begins investing early so that the right investments are picked. If one picks wrong investments he would get stuck to his investments for the next three years.

ELSS comes with the lowest-lock in period and you can reduce your taxes by investing in these schemes. If you have a high-risk appetite these are the right investments for you because 80% of the capital is put in equity. Having said that it is important you do not pick funds based on its short-term performance (six-month to one-year returns) and it holds true for all mutual funds schemes.

ELSS has both growth and dividend options to choose, but it is important for to remember that if you opt for the dividend option it will come out of your own money - so only if you need a second income should you pick a dividend option. For creation of growth option is ideal.

It isn’t advisable to gather too many ELSS funds or switch funds every three years, because doing so could only take away the wealth creation ability a fund may have. Also redeeming a fund after the 3-year period isn’t compulsory. This helps you to benefit from the power of compounding in the long-run.

Having said that, if you are a conservative investor it is best you choose other safe options available in the tax-saver category.