As much as every taxpayer despises paying taxes, they equally aspire to build wealth. Yet, chances are high to come across taxpayers who seldom deploy their tax savings into equity instruments. It is not surprising to find most taxpayers focusing on savings than using it as an investment window. Investing in equity has the potential to beat inflation, which is the only known asset class which beats inflation in the long run. For this reason alone, every taxpayer should make the most of the available tax deduction that can be deployed in suitable equity instruments.
In this context, the equity linked savings scheme (ELSS) is unique. It has significant equity exposure, is an avenue to save income tax, has the shortest lock-in period among the available tax savings options under Section 80C and the capital gains on redemption are tax free. It is also unique as it is the only mutual fund scheme open for investments to only individual taxpayers and HUFs (Hindu Undivided Families). Structurally, these are like any other diversified equity mutual fund, which is approved by the Central Board of Direct Taxes (CBDT) to qualify as a tax-saving instrument. So, investments in this fund qualify for tax exemption under Section 80C of the Income Tax Act, 1961.
The mutual fund structure ensures that these funds come with the dual advantage of capital appreciation and tax benefits. It also comes only in the growth option, so there are no complications of dividends and reinvestments when it comes to ELSS. What this means is that by investing in ELSS, you effectively hit two birds with one stone— you can claim deductions under Section 80C when investing in these schemes and you also get to experience the potential of equity investments through a mutual fund. All these qualities make the ELSS and to some extent Ulips too, as suitable first time equity investments for individuals. The wide variety of choice within the universe of ELSS and Ulip fund options, make them versatile for taxpayers to select one that is aligned to their risk taking ability. To sum it up, these are ideal for first time investors as it allows them to experience equity investments and mutual funds, which over time gives them the necessary confidence to increase their exposure to equities and build wealth in the long run.