Reducing tax liability and creating wealth are two important goals that many want to accomplish. Though ample financial investments assist you to do so, at times it becomes tough to invest in distinct investment products to address your financial goals. During such testing times, when your income is under huge strain, investing in multiple financial instruments may appear as a challenge. However, accomplishing twin goals is important.
At times you may wonder if there’s any instrument through which you can attain both goals simultaneously. Yes, there is, and it is known as ELSS (equity-linked savings scheme). Read on to understand what it is and how you can meet your wealth creation goal.
What are ELSS funds?
ELSS fund is one of the important mutual fund categories that make investments in equities. In simpler terms, ELSS invest a considerable portion of your corpus in equities. The composition of ELSS is in a way that makes this fund equity heavy. ELSS invests 80 per cent of the corpus in equities and equity-linked instruments. As the fund is equity heavy, it has a high potential to yield inflation-beating returns over the long term.
Note that ELSS investment qualifies for tax exemption under Section 80C. This means the amount invested in ELSS qualifies for tax deduction available under the limit of Rs 1.50 lakh. So, if you have not exhausted this specific limit, ELSS investing can assist you to reduce your tax liability.
To place this numerically, suppose you have invested Rs 90,000 in other investment instruments specified under Section 80C in a specific financial year, you still can invest a surplus amount of Rs 60,000. Making this investment in ELSS can assist you in further reducing your tax liability.
What is the lock-in of ELSS?
Lock-in is a vital feature of the ELSS fund that you must beware of. ELSS investments come with a lock-in period of three years. This means you cannot withdraw funds for a period of three years. Note that this lock-in period is the lowest among all available tax-saving instruments.
Lock-in endows higher time for your funds to grow. It is recommended not to withdraw funds unless it is thoroughly necessary, even after lock-in. It is because the compounding effect can throw up its magic on your investments i.e., the longer you remain invested, the higher wealth you generate. So, compounding plays a very important role in wealth augmenting. If you remain invested for a long time period, the quantum of volatility decreases.
This is because equities, by nature, are volatile asset classes, meaning they can be extremely volatile over the short run. However, if you remain invested for a long time period, this eases volatility exceedingly. Also, it assists you to remain invested across distinct market cycles and makes you a disciplined investor.
How to create a massive corpus through ELSS?
In case you are wondering how to form wealth just by investing in an ELSS fund and at the same time want to save tax, here’s a brief idea. Suppose you earn an annual income of Rs 12 lakh. This means you fall in the 30 per cent income tax slab. Now, if you invest a sum of Rs 1.50 lakh in ELSS per year, then you can save income taxes of Rs 46,800 on this income.
Suppose you make a monthly investment of 10,000 in the ELSS fund scheme through SIP at a return rate of 11 % per annum for 20 years, then your overall corpus generated would be Rs 86.56 lakh. So, the trick here is to remain invested for the long term.
As evident, making the correct ELSS investment can help you earn long-term wealth and strengthen your financial footing. Not just can you lower your tax liability but also leverage the equity potential to increase your wealth over time.