The last quarter of the financial year is nearing, and your employer must have sent out reminders to furnish details of your tax saving investments. Starting this year, you can opt for lower tax rates by foregoing deductions under Chapter VI-A (including section 80 C). However, those of you sticking to the old regime must now be scouting for investment options to save on tax.

With the shortest lock-in period amongst tax saving investments under section 80 C, Equity Linked Savings Schemes (ELSS) may be a preferred choice for most. If you are considering end-of-the-year investments in ELSS, here is what you should keep in mind.

#1 Stick to goals

Just as with any investment decision, aligning your investment to your financial goals will be wise. More often than not, tax saving should just be treated as an added perk and not be miscategorised as an investment goal.

If you have already crossed your required threshold of equity investments, considering ELSS for tax savings, again, may not be good for your portfolio, in view of the need for judicious asset allocation and avoiding concentration risks. .

Agreed, annual savings (in taxable income) of up to ₹1.5 lakh under section 80 C of the Income Tax Act may definitely be substantial. However, there are options aplenty to make up for that sum, every year. The 5-year tax saving deposits offered by banks or 5-year time deposits of the Post Office, National Savings Certificate (NSC) or the Senior Citizen Savings Scheme (SCSS) –– with lock-in period of 5 years –– or contributions to Public Provident Fund (PPF) that need to be deposited in the account for 15 years may not be your preferred choices due to longer mandatory lock-in period. One can, however, still make up for the ₹1.5-lakh deduction through other routes.

For salaried folks, employee contributions to Employee Provident Fund (EPF) may cover for most of the deduction under section 80 C already. Besides certain expenses such as life insurance premium paid for self, spouse and/or children, tuition fees (excluding donations or development fees) paid for children’s education (can claim for up to a max of two children), and principal repayment towards your home loan are also eligible for deduction under section 80 C.

Only after adding up the above eligible deductions, and if there is any shortfall to the said limit of ₹1.5 lakh every year, should one consider any tax saving investment.

#2 Understand the product

Within tax-saving investments eligible under section 80 C, while a shorter lock-in for the ELSS may be alluring, do keep in mind that the lock-in period is a mandatory one. That is, while one can pay a penalty and withdraw ahead of the stipulated lock-in period, as in the case of investments in the SCSS (after deduction of 1-1.5 per cent from the amount invested), or by foregoing 2 per cent interest on the 5-year time deposit offered by Post Office or banks, no such provision is available for ELSS investments. Premature withdrawal from investments in EPF or PPF is also allowed subject to conditions, while one can prematurely close an NSC investment only on death of depositor.

Besides, ELSS are essentially mutual funds that invest predominantly in the equity markets. Hence the returns generated from ELSS can be very volatile as against fixed returns generated on the tax saving deposits, NSC or SCSS.

While returns on EPF or PPF are not guaranteed (at the time of investment) either, they can be estimated with greater certainty when compared to those on ELSS.

That apart, while the investment helps save taxes, returns on ELSS are taxable. While dividends from the fund are taxed as per your slab rates, long-term capital gains (since it can be sold only after 3 years) at the time of redemption are taxed at 10 per cent.

However, aggregate long-term capital gains (LTCG) in any year are exempt up to ₹1 lakh. Considering the returns one could generate, other investment options with Exempt-Exempt-Exempt (EEE) status may be beneficial.

For instance, investments in Sukanya Samriddhi Account, EPF (subject to conditions) or PPF are exempt at all three stages from taxes — upon investments, intermediate returns and on redemption. Investment in Unit Linked Insurance Plans, up to ₹2.5 lakh in any year, also enjoys EEE tax status.

If youfeel ELSS may best fit your savings goals depending on your risk appetite, it is advisable to opt for the growth option.

This is because unlike the dividend option, the growth option helps you benefit from re-investment of your returns and also make the most of the tax savings, if your income is taxed at the highest slab rates.

#3 Plan ahead

If ELSS is the best option for you, it is advisable to plan your investments in advance. Given the rip-roaring valuations at which domestic equities are currently trading, a lump sum may not be the right way to approach your ELSS investments. While starting a SIP at the beginning of the year would ideally be the best way to go about it, one can still stagger ELSS investments over the remaining four months (December 2021 to March 2022), this year. This way you can protect your investments against market volatility.

From the coming years onwards, plan well in advance and arrive at the amount you would need to invest in ELSS to make up for the ₹1.5 lakh deduction limit and opt for the monthly SIP route. Depending on the performance track record of the funds, try to stick to the same set of ELSS funds instead of investing in a new scheme every year. This is because while diversification has its own merits, too much of anything can be harmful for your portfolio.