Q: Hi Adhil. I’m falling short by Rs. 5000 to exhaust the 80C tax deduction threshold, and hence planning to invest in an ELSS to bridge that gap. But since the investment amount isn’t very high, I’m unable to decide whether investing in ELSS would be worth it at all for such a meagre sum. Kindly advise. – Anand
Ans: Hi, there. The minimum investment amount in an Equity Linked Savings Schemes is usually Rs. 500, so you can easily go ahead and invest Rs. 5000 in an ELSS and exhaust the 80C tax deduction benefit up to Rs. 1.5 lakh if your risk appetite allows you to do so. This is important as ELSS are market-linked investment products that come with medium-to-high investment risk. They also come with a mandatory lock-in of 3 years. You can invest Rs. 5000 in one-go as a lump sum in your chosen ELSS fund (preferably if you know how to time your investment) or break the investment into small instalments through an SIP plan which might fetch better returns in the long-term. However, if you finalise your investment decision towards the very end of the financial year, you might have to make a lump sum investment to exhaust the 80C deduction limit.
That said, it’s critical to understand that your financial goals and not just tax-saving compulsions should ideally dictate your investment plans. So, invest in a top-rated ELSS only if it’s completely aligned with your returns expectations, risk-taking ability and liquidity requirements. And these considerations should primarily help you ascertain how much should you invest and in which instrument (or a combination of instruments) in order to meet the desired targets on time. As far as ELSS funds are concerned, their major advantages include the fact that they could generate higher returns than debt investments in the long-term (depending on your chosen fund’s performance), low lock-in period, and they’re extremely easy to invest in. You can, in fact, start an ELSS investment online in minutes if you have a KYC-compliant bank account.
Irrespective of the investment amount, if investing in ELSS doesn’t suit your risk profile, you can also consider other low-risk options like Voluntary Provident Fund (if you’re a salaried individual), Sukanya Samriddhi Yojana (if you’re a parent to daughter younger than 10 years) and even Public Provident Fund (if you don’t already have a PPF account to your name) among other options based on feasibility and your financial goals. You can also consider buying a life insurance plan if required as even they qualify for tax deduction benefits up to Rs. 1.5 lakh u/s 80C of the I-T Act.
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards.