Why Tax saving via ELSS is a preferred option?

We are in now in the final quarter of FY 2023-24 / AY 2024-25. If you have not done your tax planning for Assessment Year 2024-25 (FY 2023-24), then it still not too late; January and February 2024 is still a good time to start your tax planning. Section 80C of Income Tax Act of 1961 allows taxpayers to claim deduction of up to Rs 150,000 from their taxable incomes by investing in certain eligible instruments. These instruments include Employee and Voluntary Provident Fund (EPF and VPF), Public Provident Fund (PPF), National Savings Certificates (NSC), 5 year lock-in tax saver bank fixed deposits, life insurance policies (both traditional and unit linked) and mutual fund Equity Linked Savings Schemes (ELSS).

Why you need to plan your tax well in advance?

You can file your income tax returns under any one of the two tax regimes – the Old Tax Regime and the New Tax Regime. The tax rates for various income slabs below Rs 15 lakhs are lower under the New Tax Regime. But you cannot claim any deductions in the New Tax Regimes. On the other hand, in the Old Tax Regime, you can claim deductions for 80C investments and under various other sections of Income Tax Act e.g. 80CCD (NPS), 80D (health insurance), Section 24 of Income tax act on home loan interest etc. If you are able to claim some of these deductions, depending on your circumstances, then the Old Tax Regime may be more beneficial for you. Therefore, it is important that you start your tax planning early so that you are able to evaluate different scenarios and make informed tax planning decisions after consulting your tax advisor. Also you need to give yourself sufficient time to have the required savings to make your 80C investments. All the more reason as to why you need to plan your taxes well in advance.

How to go about tax planning with 80C investments?

• The maximum allowable deduction irrespective of income tax slabs u/s 80C is Rs 150,000.


• If you are a salaried investor and contributing to EPF, your contribution to EPF will be included in 80C deduction.


• If you are paying home loan EMIs, then the principal component of the EMI payments for the year will also be included.


• If you have life insurance policies, the premium for the year will be included.


• Calculate how much deductions you can claim from the above and how much investment you need in order to claim the full benefit u/s 80C.


• Select the suitable 80C scheme for making your tax saving investments depending on your risk appetite and financial goals.


• If you have high risk appetite and are looking for wealth creation along with tax savings, then ELSS can be a suitable 80C tax saving option.

What is ELSS?

Equity linked savings schemes (ELSS) are equity mutual fund schemes. Investments in ELSS are eligible for deductions from your taxable income under Section 80C of Income Tax Act 1961. There is no upper limit on investments in ELSS, but maximum deduction allowed u/s 80C is capped at Rs 150,000. ELSS funds have a lock-in period of 3 years. No redemption or withdrawal is allowed in the lock-in period.

The lock-in period in ELSS works to investor’s advantage since fund managers face less redemption pressure in ELSS compared to other open ended schemes and are able to stick to their high conviction stocks. Since ELSS funds are market linked investments, they are subject to market risks. You should invest according to your risk appetite and consult with your financial advisor or mutual fund distributor if you need help in making investment decisions.

Suggested reading why tax planning with mutual funds is a good option

Why invest in ELSS?

• Equity as an asset class, though volatile, has historically given inflation beating returns over long investment horizons. The mean CAGR of 10 year rolling returns of Sensex from 01.06.2023 to 31.05.2023 was 12.63% (source: as per AMFI Best Practice guidelines 109). Average CPI Inflation rate over the same period was 5.1% (source: World Bank, Forbes, as 30.11.2023).


• Tax planning should not be just about tax savings; it should also help you in your long term financial goals. ELSS fund managers aim to beat the market benchmark index and create alpha for investors. ELSS investments have the potential to create wealth over long investment tenures. (Disclaimer: Equity investments are subject to market risks).


• ELSS provides liquidity compared to other 80C investment options. ELSS has lock-in period of just 3 years. Other 80C investments do not provide any liquidity before minimum 5 years. Liquidity is always an important consideration in investments.


• ELSS is one of the most tax efficient investment options u/s 80C. Capital gains of up to Rs 100,000 in a financial year are tax free and taxed at 10% (plus applicable surcharge and cess) thereafter.

You may also like to read 6 reasons to invest in ELSS now

Who should invest in ELSS?

• Investors who are looking for tax savings and capital appreciation over long investment tenures.


• Investors with moderately high to high-risk appetites. Consult with your financial advisor, if you are unsure about your risk appetite.


• Investors with minimum 3 years (lock-in period) investment tenure.

Investors should consult with their financial advisors or mutual fund distributors if ELSS is suitable for their tax planning needs and invest as soon as possible in order to claim tax benefits in this financial year.

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Visit https://grp.hsbc/KYCr w.r.t. one-time Know Your Customer (KYC) process, complaints redressal process including SEBI SCORES (https://www.scores.gov.in). Investors should only deal with Registered Mutual Funds, to be verified on SEBI website under Intermediaries/Market Infrastructure Institutions (https://www.sebi.gov.in/intermediaries.html). Investors may refer to the section on Investor Education on the website of HSBC Mutual Fund for the details on all Investor Education and Awareness Initiatives undertaken by HSBC Mutual Fund.

Issued as an investor education initiative by HSBC Mutual Fund.

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