From an year end activity, tax saving investments moved to a recurring one parallel to the earning event of the tax payer with availability of Tax Saving Mutual Funds.
An ELSS is an Equity Linked Savings Scheme, that allows an individual or HUF a deduction from total income of up to Rs. 1.5 lacs under Sec 80C of Income Tax Act 1961.
Thus if an investor was to invest
Rs. 50,000 in an ELSS, then this amount would be deducted from the total
taxable income, thus reducing his/her tax burden.
These schemes have a lock-in period
of three years from date of units allotment. After the lock-in period is over,
the units are free to be redeemed or switched. ELSS offer both growth and
dividend options. Investors can also invest through Systematic Investment Plans (SIP), and
investments up to ₹ 1.5 lakhs, made in a financial year are eligible for tax
deduction
Advantage of ELSS
a. ELSS funds are the only
tax-saving funds within the Rs 1.5 lakh limit which has the additional
advantage of giving equity-linked returns.
b.
Investing into ELSS allows you dual benefits – you get capital appreciation and
tax benefits.
c. ELSS has the shortest
lock-in period of three years when compared to other tax-saving instruments
like PPF and NSC.
d.
Since they are equity market linked, ELSS funds can bring in good returns
over the long term, especially if retained after the
lock-in period is over.
e. Good investment funds for
those with moderate to high risk-appetite.
f.
Dividends from ELSS funds are tax-free during the investment period.
g. Profits from sale of ELSS fund
units are considered long-term capital gains and hence, are tax free.
How to invest
·
The
best way of investing into ELSS funds is through monthly SIPs (systematic investment
plan). The minimum investment through a SIP can be as low as Rs 500 per month.
·
At
the start of every year, work out the statutory deductions and calculate what
you have left over from the Rs 1.5 lakh limit. Divide this amount by 12 to
decide your SIP amount.
Previously, ELSS returns were tax-free. However, post Budget
2018, the long-term capital gains tax over Rs.1 lakh are taxable at 10%. The
investor would not get the benefit of indexation. Even after the 10% tax cut,
ELSS has the potential to deliver superior returns compared to other tax saving
instruments. The perks of ELSS investments are not limited to the taxes saved.
The power of compounding ensures that your investment is doubled if you invest
for, say, five years (tenure of tax-saving FD). Furthermore, the minimum
lock-in period is only three years.
|
Particulars |
ELSS |
Tax Saving FD |
|
Definition |
ELSS is a type of mutual fund that invests predominantly in
equities or equity-oriented products. |
A traditional investment instrument that you can invest as a
lump sum with any bank. |
|
Returns |
Not fixed and subject to equity market risks. However, it has
delivered 14%-16% returns in the last 5 years. |
The bank decides the interest rate – starts from 6% to 7.5%. |
|
Term |
3 year lock-in period is compulsory, after which you can
redeem or reinvest. |
The minimum tenure is 5 years, but you can extend it up to 10
years. |
|
Tax-efficiency |
10% LTCG tax on the gains over and above 1 lakhs |
As per your tax slab |
|
Lock-in |
3 years |
5 years |
|
Risks |
ELSS due to their equity exposure is risky but has delivered
historically good returns. |
It assures capital protection and is as safe as any regular
FD. |
|
Online option |
One can start an ELSS online – as a lump sum or SIP |
Not all banks offer an online facility to open an FD. |
|
Liquidity |
You may exit or withdraw ELSS after 3 years. |
You cannot withdraw tax saving FD before 5 years. |
Rate of return received
in the last 3 years as per moneycontrol.com is given for reference. The difference
in rate of return occur among mutual funds due to security selection, management
style and seamless processing etc..
However, mutual funds (MFs) are not all about tax savings and
market risks, and may suit the financial needs of any person – be a risk taker
or a risk averse. There are also different categories of funds to cater to the
short-term or long-term needs. Consult your investment advisor before
investing.
Statutory warning – “Mutual fund investments are subject to
market risks. Please read the offer document carefully before investing.”
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