Why ELSS is the best tax saving instrument

Tax planning for many of you is an annual exercise that you do once in a year and that too in last 2-3 months of the financial year. Despite knowing the fact that it should be planned at the start of the financial year and should be executed during the entire year. Last minute planning and execution may give you sub-optimal results.

For a salaried person, tax planning primarily comprises of planning investment under section 80C of Income Tax Act. There are various tax saving instruments available for deduction under sec 80C, which allows a taxpayer to avail deductions up to Rs. 1.5 lakhs. Depending on the income tax bracket applicable to you, an investment of Rs. 1.5 lakhs in these instruments can save you a maximum of Rs. 46,350 in taxes. Assuming your income fits into the highest tax bracket. One of the best instrument under section 80C is Equity Linked Saving Scheme (ELSS). These are the special tax saving mutual funds, which are required to invest atleast  65% of their portfolio in the stock market.

ELSS outscores other investment instruments in the same category in various areas. First, they tend to give better returns than other investment avenues. Despite majority part of the fund being invested in equity, which is supposed to be more volatile, the long-term returns are better than others. In the last 5 years, the mutual funds in this category have given an annualised return of 19 per cent. Compare this with return given by other instruments that do not go beyond 10 per cent. It's not only about the returns, investment in ELSS comes under the EEE (exempt-exempt-exempt) category, thus not just the investment amount, even their dividend income and maturity proceeds are entirely tax-free. PPF is the only other product under the umbrella of Section 80C that falls under EEE regime. One more advantage of investing in ELSS is that the lock-in period in such scheme is just 3 years, lowest among its category.

Therefore, if you have not already planned or investment in tax saving instruments, you should start now and start investing in ELSS for better returns.