Why ELSS is best tax-saving instrument under section 80C

Among a slew of tax-saving instruments under section 80-C, ELSS returned the most in the last five years

(ELSS) returned the most in the last five years, although it has the lowest lock-in period of just three years. Image source:

Among a slew of instruments available under section 80C of The Income-tax Act, 1961, equity-linked savings schemes (ELSS) returned the most in the last five years, although it has the lowest lock-in period of just three years.

Section 80 C is the most commonly used section for saving taxes. Other than ELSS, it includes premium paid towards a life insurance policy, Public Provident Fund (PPF), National Savings Certificate (NSC), five-year notified tax-saving bank deposits, five-year post office time deposits, Senior Citizens' Savings Scheme (SCSS), Sukanya Samriddhi Account, and Employees' Provident Fund (EPF) etc under its ambit.

Under expenses and outflows, the 80C section also includes principal component of a housing loan repayment, expenses on children’s tuition fee and so on.

The maximum tax that can be saved under section 80C is Rs 7,725, Rs 30,900 and Rs 46,350 for 5.15 per cent, 20.6 per cent and 30.9 per cent tax brackets, respectively.

Looking into the data of the last five years, ELSS returned over 19 per cent, while investment under PPF, NSC, Bank FD, and Employee Provident Fund grew just in the range of 8.4 to 8.7 per cent during the same period.

What is ELSS?

ELSS is the only pure equity product notified under section 80-C to save taxes. ELSS funds enjoy the "EEE status" i.e. they are exempt from taxes at the time of investment, accumulation and withdrawal. Although ELSS comes with a lock-in period of three-year, tax savers should invest in them for a longer horizon as equities return better in the longer-term.

For example, a monthly systemic investment plan (SIP) plan of Rs 5000 invested between May 22, 2007 and May 22, 2017 would have returned you a corpus of Rs 44.5 lakh, while you invested only Rs 9 lakh during the period.