Investments in an ELSS or Equity Linked Saving Scheme qualify for tax deductions under Section 80C of the Income Tax Act. You can invest up to Rs 1.5 lakh in a financial year in a tax saving mutual fund scheme and claim tax deductions on your investments.
Your should first try to find out how much you need to invest to exhaust the Section 80C limit of Rs 1.5 lakh. You should remember that your insurance premium, contributions to Employee’s Provident Fund (EPF) and so on are covered under Section 80C. If you are working and contributing to EPF and if you have a life insurance premium, you should deduct the amount from Rs 1.5 lakh and find out how much extra you need to invest.
The tax planning exercise should be part of your overall financial planning. That means, you should choose your tax saving investment based on your financial goal, investment horizon, and risk profile. If you have a high risk appetite and investing for a long period of a five to seven years, you may consider investing in ELSS funds. However, if you do not have the necessary risk appetite and want safer options that offer assured returns, you should stick to government-backed PPF, NSC, tax-saving 5-year bank FD, etc.
Here are our recommended ELSS funds:
Best ELSS funds to invest in 2020