This is an important question that needs an answer. We noticed many users were setting SIPs of Rs 12,500 in ELSS Schemes without factoring in other qualifying deductions that they may already be eligible for. That’s because Rs 1,50,000 is the limit under 80C. In effect, one could end up investing much more than what is required.
ELSS is a good investment option because of the associated tax benefits. So learn how much you should invest in ELSS and do not invest more than that. Invest any surpluses in more suitable mutual fund schemes that can offer better returns than ELSS Schemes.
If your total taxable income for the year is greater than 4 lakhs and you are not a senior citizen, a simple way to calculate the maximum amount you should be investing in ELSS is as follows.
ELSS investment for the year = 1,50,000 Less Total Employee Provident Fund contribution for the year Less Other 80 C deductions* available to you.
Let’s take an example. From your salary, there is a deduction of Rs 6,000 every month (or 72,000 for the year). Additionally, you have an Insurance Policy for which you pay Rs 24,000 per year. And you have no other qualifying deductions from the list below.
Now using the above method, the amount that you should invest in ELSS is Rs 54,000 (150,000- 72,000 – 24,000) during the year. You can invest this entire amount in one go or invest Rs 4,500 monthly (SIP). Of course, we recommend setting up a SIP as this will help you to avoid the last minute rush to arrange for funds to invest and make hasty investment choices.
By restricting the amount you invest to Rs 54,000/-, you have the option to invest any surplus in equity mutual fund schemes without a 3-year lock-in. More importantly, these equity mutual fund schemes may have a better risk-reward payoff than a Tax Saving Fund.
In short, don’t invest more than what is required in ELSS to avail the maximum deduction.
If you have any questions about ELSS schemes, read about what they are and why they are a superior option for savings taxes.
Edit: since a lot of investors have asked us, you can find the best ELSS funds to invest in here
*List of deductions available under Section 80C:
- PPF (Public Provident Fund)
- EPF (Employees’ Provident Fund)
- Five year Bank or Post office Tax Saving Deposits
- NSC (National Savings Certificates)
- ELSS Mutual Funds (Equity Linked Saving Schemes)
- Kid’s Tuition Fees
- Principal repayment of Home Loan
- NPS (National Pension System) [An additional Rs50k of a tax-exempt investment is allowed over and above the Rs1.5lakh allowed under 80C]
- Life Insurance Premiums
- Sukanya Samriddhi Account Deposit Scheme
