Read on to understand if it is wise to go for an ELSS fund even if your income is less than the threshold limit
Equity linked saving scheme (ELSS) or tax-saving mutual funds, as they are commonly known, are a great way to avail tax benefits and invest for your long-term goals. They have generated an annualised return of over 14 per cent in the last 10 years. Investment of up to Rs 1.5 lakh in tax-saving funds is eligible for deduction from taxable income under section 80C of the Income Tax Act. These are pure equity funds and quite similar to flexi-cap funds in their investment mandate. The fund manager has the flexibility to invest across companies of different sizes and sectors in any proportion.
However, one must note that investment in ELSS has a mandatory lock-in period of three years. And if you are investing through a monthly SIP, the three-year period is counted separately for each SIP instalment. For example, if you are investing Rs 5,000 per month through an SIP and start in May 2022, the three years for the first SIP instalment will complete in May 2025, for the second in June 2025, for the third in July 2025 and so on.
While three-years is too short a time period for any equity oriented investment, it can unnecessarily lock your money if you are not looking for tax benefits under section 80C of the Income Tax Act. Investing in a flexi-cap fund would be a much better choice as you would be free to redeem your money in case of any emergency or if something goes horribly wrong with the fund.
However, if you lack investment discipline and fear using the money intermittently for any other reason, or fear redeeming it out of panic during short-term market falls, then the three-year lock in period would be an advantage for you. It won't let you redeem before three years and by then, hopefully, you will start understanding the benefit of staying invested in equities. In such a scenario, you can choose to invest in a tax-saving fund even if you do not need to claim the benefit under section 80C. Otherwise, there is no other specific advantage in comparison to a pure flexi-cap fund for someone who doesn't need tax benefit.