Should I invest more than Rs 1.5 lakh in ELSS funds?

There is a small difference in the following 2 questions: SHOULD I invest more than Rs 1.5 lakh in ELSS funds? And next one is CAN I invest more than Rs 1.5 lakh in ELSS funds?

As you would have noticed, the difference is in the first word, i.e. CAN vs. SHOULD.

So can you invest more than Rs 1.5 lac in ELSS funds?

The answer is Yes. There is no upper limit for ELSS investments in a financial year. You can invest more than Rs 1.5 lakh in an ELSS fund in a year or for that matter, you can invest as much as you want. But since ELSS qualifies for tax-saving options, you can claim tax deductions only to the limit of Rs 1.5 lakh. That is, your ELSS investments exceeding Rs. 1.5 lakh are not eligible for any additional tax deductions under Section 80C of the Income Tax Act, 1961.

But should you invest more than Rs 1.5 lac in ELSS funds?

That is another matter with different aspects to consider.

So let’s discuss these points in brief about should you invest more than Rs 1.5 lakh in ELSS schemes?

One major reason why it doesn’t make sense to invest in excess of Rs 1.5 lakh per year in ELSS funds is that it has a 3-year lock-in period. Most ELSS funds have portfolios that have stocks of companies of all sizes – large, mid and small stocks. It is like having a sort of Flexi-cap fund portfolio. So in a way, most ELSS funds are nothing more than Flexi-cap funds with a lock-in of 3 years. So if you have a similar investment option where you can expect similar returns, then what is the point of unnecessarily locking in your money for 3 years? Isn’t it?

Given that the expected returns aren’t exceedingly different from non-ELSS diversified equity funds, I don’t think that there’s no real need to invest more than what’s required to get your tax benefits limited at Rs 1.5 lakh per year.

So if you do have to invest more than Rs 1.5 lakh in equities and you have already exhausted your 1.5 lac limit of Section 80 C, then look beyond ELSS funds that have lock-in, go for non-ELSS diversified equity funds that come in different varieties like large-cap funds, index funds, Flexi-cap funds, mid-cap funds amongst many other mutual fund categories.

Then there is the idea of having the right asset allocation. So if you have to invest in equity, then ELSS or non-ELSS funds are fine. But if you need to invest an additional amount in debt to handle your allocation management, then you can go for Voluntary Provident Fund or PPF. Now interest on EPF contributions above Rs 2.5 lakh are taxed. So you can first invest more in PPF and then look towards VPF for maximizing your post-tax returns from debt portfolio. And then, you can look at suitable debt fund categories too. Talking of EPFs and the limit on tax-free contribution, now EPF account holders face a new dilemma about whether to invest more than Rs 2.5 lakh in EPF or not?

Related reading: Choosing between PPF and ELSS Funds

At times, many new investors end up investing more than Rs 1.5 lakh a year in Equity Linked Savings Schemes (ELSS) as they are unaware of the fact that they can claim a deduction of a maximum up to Rs 1.50 lakh under Section 80C. But eventually when it is realized that you need to invest more than Rs 1.5 lakh in equities, then it’s best to look for other equity schemes (other than ELSS funds) based on your risk profile and financial goals. Investing more money than the maximum allowed limit of Rs 1.50 lakh will only lock it unnecessarily without any additional benefits.

Further readings on ELSS funds:

Also, remember that saving taxes is just one of the many aspects of your financial life. You can’t just focus on saving taxes. You actually need to ensure things like will I have sufficient fund for my children’s education when the time comes? Will I have enough money to retire comfortably or get out of the mad-rat race and have my financial freedom? Will I have enough money to tackle all the above goals and also buy myself a dream house and close the home loan quickly? So how do you solve all these dilemmas without being financial overwhelmed? The answer lies in getting yourself an all-encompassing comprehensive financial plan. Once you link all your investment to financial goals, you will have a very clear idea about where you are headed in your financial life.

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So I hope your questions about Should I invest more than Rs 1.5 lakh a year in ELSS? and related aspects are now adequately answered.

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