Tuesday, April 30, 2019

Is it necessary to invest in ELSS beyond the 80 C section limit?


Is there any definite reason on how to start investing in ELSS? Clearly there are 4 major reasons on why you should invest in ELSS. First and foremost it offers you rebate under section 80 C of the income tax act that is to a limit of 1.5 lakh. In fact this is part of an umbrella bracket that ELSS shares with other investment ventures. In addition ELSS has a lock in period of 3 years that is traditional low when you compare it to other investment types in the form of ULIPs , term deposits etc.  Thirdly the approach of ELSS is a long term investment   as you do go on to invests in equities. A lock in period of 3 years would be a perfect way to start your investment journey.

Would there be any upper limit when you are investing in ELSS?

No upper limit is set forth on the amount of money you can invest in ELSS. Yes your tax rebate would be applicable to the tune of 1, 50,000 under section 80 C of the Income tax act. Even if you have gone on to complete the limit of 1, 50,000 you can invest any amount in ELSS. For the first time investors it is a blessing in disguise as it provides an opportunity of wealth creation and tax saving.

Another interesting trend is associated with ELSS funds. As there is a lock in period of 3 years, managers have a leeway in adopting a long term approach to this portfolio. The reason being liquidity investments are not high when you compare it to the other investment types. This would create a situation where you are going to align the goals of the fund managers with that of the investors.

Would it be a sensible move to invest in ELSS once you have touched the 80 C section limit?

 Let us explain things with an example. Suppose you are having a surplus fund of 2.25 lakh to invest. Now out of this you go on to invest 1.50 lakh under section 80 C of the income tax act to claim full deduction. Now the question is would be it be a sensible move to invest the remaining in ELSS? The logic behind this theory is that since there is a 3 year lock in period it can outperform the index. This would be considering the fact that the managers would opt for a long term view and then hold cash.

When it is a diversified portfolio ELSS has a mandatory lock in period of 3 years. No way it matters whether you are claiming deductions under section 80 C of the Income tax act or not. The question is do you need to invest in any funds without any tax benefit. An option would be to make a foray into diversified fund with the discipline of a long term financial goal.

Be aware that any ELSS decision should not be done in isolation.

Author: verified_user