Should You Invest in ELSS Beyond Section 80C?

Are you looking to grow your wealth and save taxes? Do you seek an inflation-beating return from your investment? You may consider putting your money in the equity-linked savings scheme or ELSS. It is a tax-saving mutual fund that invests most of your money in equity and equity-related instruments. The investment is eligible for a tax deduction up to a maximum of Rs 1.5 lakh a year under Section 80C of the Income Tax Act, 1961. ELSS has the shortest lock-in period of only three years among tax-saving investments under Section 80C. However, should you invest in ELSS beyond Section 80C?

You may invest in ELSS if this is your first time in the stock market. It has a lock-in period of three years which helps you secure your savings. You may put your money in the ELSS without any upper limit. However, you will not get the benefit of a tax deduction under Section 80C, beyond Rs 1.5 lakh for the financial year. 

Should you invest in ELSS after exhausting the Section 80C limit?

ELSS is an excellent tax-saving investment under Section 80C. You may consider investing in the ELSS if it matches your investment horizon and risk tolerance. However, ELSS has a compulsory lock-in period of three years, unlike other equity funds. Investing in ELSS beyond the overall Section 80C limit may compromise your financial goals. You will have to lock your money for three years without getting any special tax benefit in return. 

You may allocate money towards an ELSS investment as part of your overall financial plan. You may consider investing in ELSS only up to the Section 80C limit.

ELSS invests the bulk of the corpus in stocks and you may overexpose your portfolio to equity. You could struggle to rebalance your portfolio as the ELSS has a lock-in period. 

Also Read: 5 Reasons to Invest in ELSS Over Other Tax-Saving Investment Options

You may consider increasing the allocation of your portfolio towards equity by putting money in equity-diversified mutual funds. It invests the corpus in shares of companies across different sectors and industries. Diversification may protect your investment from volatility in the stock market. You may get a high return over the long-term without having to worry about a lock-in period. It gives you the flexibility to achieve your financial goals. You may switch between mutual funds in-line with your investment horizon and risk appetite. 

You could invest in the ELSS to enjoy the tax deduction under Section 80C. However, you don’t enjoy any added advantage on your ELSS investment over Rs 1.5 lakh in a financial year. You may consider putting your money in an equity fund that could offer a similar return as an ELSS fund over the long-run. You can easily rebalance your portfolio without having to worry about the lock-in period. 

You must always invest your money based on your financial goals and risk tolerance. ELSS helps you to save taxes because of the tax deduction under Section 80C. It doesn’t offer you any special tax benefit on investment above Rs 1.5 lakh in a financial year. You may invest in an equity fund instead of the ELSS which has a lock-in period. In a nutshell, you may choose an investment where you may rebalance the portfolio to achieve your financial goals. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in