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ET Wealth

Five reasons why you should invest in an ELSS in this financial year

Tax benefit under Section 80C
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Tax benefit under Section 80C

As said before, your investments in ELSS are eligible for a tax deduction of up to Rs 1.5 lakh from your gross total income under Section 80C of the Income Tax Act. Though you can avail a maximum tax deduction of only Rs 1.5 lakh under the section, there is no limit on the amount you can invest in these schemes.

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Lowest lock-in period
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Lowest lock-in period

All tax saving investments typically come with a mandatory lock-in period. For example, PPF comes with a 15-year lock-in period. Tax-saving term deposits have a lock-in period of five years. ELSS comes with a lock-in period of three years. Though ELSSs come with a lock-in period of three years, invest in ELSSs with an investment horizon of at least five years in mind. This is just to be on a safe side as ELSS invests predominantly in stocks. And stocks are risky and volatile in the short term.

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Equity exposure
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Equity exposure

If you are a traditional investor who predominantly invest in tradition investments that come with assured returns, you should consider investing in ELSS to take a small exposure to equity. ELSS are considered ideal for first-time investors to enter the stock market. The mandatory lock-in period would help investors to weather the volatility typically associated with the stock market. In fact, you can devote your investments in ELSS for a specific long-term financial goal.

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The 10 per cent tax
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The 10 per cent tax

ELSSs, or any equity mutual funds, for that matter, will not offer tax-free returns any more. Long-term capital gains made from ELSSs would be taxed at flat 10 per cent because of the re-introduction of LTCG tax on long term capital gains of over Rs 1 lakh on equity schemes. However, even after the new 10 per cent tax, ELSS would provide better post-tax returns than other traditional tax-saving investments like PPF, NSC, five-year FD, etc. over a long period.

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No maturity date
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No maturity date

Most tax-saving investments such as PPF, tax-saving term deposit, among others, come with a maturity date. The PPF account matures in fifteen years and it can be renewed for another five years. An ELSS has no such fixed maturity date or period. You can continue to hold on to your ELSS investments as long as you wish.

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