As the last quarter of the financial year approaches, many of us find ourselves in a familiar situation – scrambling to make the most of the tax-saving opportunities available. With offices requesting tax declarations and deadlines looming, the pressure to find ways to reduce our taxable income can be overwhelming. From insurance policies to National Savings Certificates (NSCs), housing loans, and Provident Fund (PF) contributions, there are several tax-saving avenues to explore.

However, one common theme among most of these options is the long-term commitment they require, due to their significant lock-in periods. While these options help reduce your taxable income, they can often feel like a financial burden because you are locking away your money for an extended period. Here is where it gets tricky: you want to save on taxes, but you also do not want to feel restricted by long-term commitments.

The challenge of long-term commitments

Many traditional tax-saving instruments, such as PPF (Public Provident Fund), NPS (National Pension Scheme), NSC (National Savings Certificates), Senior Citizens Saving Scheme (SCSS) and more, come with high lock-in periods. Here is a quick snapshot:

The problem is that committing your money for such long periods can feel like a double whammy: you are not only locking away your hard-earned funds, but you are also missing out on other investment opportunities that might arise during that time.

It is understandable why people might shy away from such long-term commitments, especially if you are looking for flexibility and quick access to your funds.

So, is there another way to save taxes without locking up your money for years? Fortunately, the answer is yes.

Equity Linked Savings Schemes (ELSS)

One of the most effective tax-saving tools is the Equity Linked Savings Scheme (ELSS). ELSS stands out among the other options due to its short lock-in period of just 3 years, making it one of the most flexible tax-saving instruments available.

Let us dive deeper into what makes ELSS a powerful option for saving taxes without tying up your finances for excessively long periods.

What is an ELSS fund?

An Equity Linked Savings Scheme (ELSS) is an equity oriented mutual fund that invests primarily in equity and is eligible for tax deduction under section 80C of the Income Tax Act under old regime.

Where do ELSS funds invest?

ELSS funds must invest a minimum of 80% of their portfolio into stocks. This means they are designed for those who are willing to take on a moderate to high level of risk in exchange for potentially higher returns in long run. They are managed by fund managers who analyse the markets, identify growth opportunities, and create a diversified portfolio of stocks to invest in. The goal is to achieve long-term capital appreciation for investors, apart from its primary goal of tax saving.

• The short lock-in: a key advantage

  With a lock-in period of just 3 years, ELSS offers flexibility, allowing you to access your invested funds after this period. This makes it a convenient option for tax-saving, as you can manage your investments with greater ease.

• It gets even better – the potential for higher returns adds an extra advantage.

  ELSS not only offers a shorter lock-in period, but it also comes with the potential for higher returns compared to other traditional tax-saving options. Due to the equity exposure, ELSS funds tend to provide better long-term returns than PPF or tax-saving fixed deposits.

* - Current PPF/NSC/SCSS interest rate -; Current average 5 year tax savings FD rate;

Average ELSS category return for 3 years as on 25th January 2025 - https://www.advisorkhoj.com/mutual-funds-research/mutual-fund-category-returns?period=3y

ELSS funds have the potential to offer significantly higher returns. In fact, the longer you are invested, the more this advantage can compound. So, you are not just saving on taxes, but also helping your money work harder for you.

Benefits galore!

ELSS funds offer several more advantages that make them a compelling choice:

• Expert Fund Management: ELSS funds are managed by fund managers who have the expertise to navigate the complexities of the stock market. They can help optimize your investment to deliver potentially better returns in the long run.

• Diversification: ELSS funds are market cap and sector agnostic; allowing fund managers to invest in a wide variety of stocks giving you the benefits of diversification

• Tax Efficiency: Not only do you save taxes under Section 80C in old regime, but you also get the benefit of long capital gains tax if you hold the investment for more than 3 years.

Make ELSS investments lighter on your pocket

A great way to invest in ELSS is through Systematic Investment Plans (SIPs). SIPs allow you to spread your investment across the year, making it easier to manage your finances. Instead of investing a lump sum amount, you can set up an SIP mandate with your bank to invest a fixed amount every month into an ELSS fund. This not only helps you save taxes but also takes the burden off your pocket, as you invest smaller amounts regularly.

When it comes to saving taxes without feeling the pinch, ELSS offers an ideal solution. With a shorter lock-in period, the potential for higher returns, and the expertise of fund managers, ELSS is a tax-saving tool that provides a host of benefits. Whether you choose to invest through a lump sum or SIP, ELSS allows you to maximize your returns while also saving on taxes. So, as the year-end tax deadlines approach, consider giving ELSS a closer look – your future self may thank you for it.

The Tax calculation shown above is for illustration purpose and general information only. Amount(s) mentioned above may undergo a change if assumptions specified herein do not hold good. Investors are advised to read the scheme information document of the scheme carefully before investing and consult their Tax Consultant or Financial Advisor to determine tax benefits applicable to them

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.