How to save taxes, Investment Ideas

ELSS is not just an option of Tax Saving, it helps you to create Wealth

WHAT IS ELSS?

An Equity-Linked Savings Scheme (ELSS) is a special category of equity mutual funds that qualifies for tax deduction under section 80C of Income Tax Act and with a 3-year lock-in period. ELSS investments are eligible for tax deduction under Section 80C of the Income Tax Act up to a limit of Rs. 1.50 lacs per annum. Each year, you can invest this amount in ELSS funds and get the tax deduction.

WHO CAN INVEST IN ELSS?

All Individuals and HUFs are eligible to invest in ELSS mutual funds. NRIs can also invest in ELSS. However certain AMC’s doesn’t allow NRI’s from Canada/USA to invest in India due to complex taxation policies in USA/Canada.

BENEFITS OF ELSS

  • Tax Benefits
    • The amount invested in ElSS upto the limit of Rs. 1.5 lacs is deducted under sec 80C. This means savings of up to Rs. 7,500, Rs. 30,000 & Rs. 45,000 for investors in tax bracket of (5%, 20% & 30% respectively).
    • Lower taxation-Dividend and capital gain upto Rs. 1 lakh are tax free. Dividend and capital gain are taxed at 10% above Rs. 1 lakh.               
  • Power of compounding and higher return- ElSS funds invest in equity market and returns from equity are considerably higher than other asset class. For beating inflation & wealth creation Equities are the best option available; through ELSS funds we get the Equity Exposure with considerably less risk. All other tax saving options other than ELSS (barring the NPS) provides us with fixed income type returns that are barely high enough to overcome the effects of inflation. Resultantly, we end up locking in our money for anything from 5 years (for a tax saving FD) to 20 years (for many traditional life insurance plans) for a poor rate of return.
  • Smaller lock-in period An ELSS fund has a lock-in period of only three years. We can choose to hold on to the scheme or sell it after three years. In contrast, we would not be able to withdraw our money from a Public Provident Fund before 15 years. Most other instruments have a lock-in period of 5 years. This means our money is more easily available to us with an ELSS.
  • Potential for earning dividend- Investors in ELSS Mutual Funds who choose the dividend pay-out option can potentially earn dividends even before their maturity dates. Although dividends are subject to booked profits, and not guaranteed, most top performing ELSS Mutual Funds have a track records of declaring dividends anything from 1 to 2 times a year. The quantum of the dividends would be dependent on the fund’s performance.
  • Automate your investments- One of the biggest benefits we get by investing in an ELSS is that we could invest via Systematic Investment Plan (SIP). This helps us spread out the Rs. 1.5 lakh into small monthly amounts. And on fixed date, the money gets debited from your bank account automatically and this way we can invest Rs. 12,500 every month, as opposed to Rs. 1.5 lakh at a time, which can seem too big an amount. SIP also helps us to average our cost of investment too since we invest across different market conditions.

 

COMPARISON OF ELSS AND OTHER TAX SAVING SCHEMES   

     

Particulars Equity linked saving schemes(ELSS) Public Provident fund

(PPF)

National saving certificate

(NSC)

Lock-in Period 3 years 15 years {partial withdrawals are permitted after 6 years} 6 years
Returns Returns / Dividends are Market linked and not assured 8.70 % *
(Compounded Annually)
8.50 to 8.80 % *
(Compounded half-yearly)
Minimum Investment Rs. 500 Rs. 500 Rs. 100
Maximum Investment No limit^ Rs. 150,000 No limit^
Amount eligible for deduction u/s 80C Rs. 150,000 Rs. 150,000 Rs. 150,000
Taxation for interest  10% Return on dividends and capital gains above Rupees 1 Lakh Tax free Interest is Taxable
Safety/ Risk High Risk Highest Safety Highest Safety

^ While there is no maximum limit on how much can you invest, investments of only upto Rs. 150,000 per financial year are allowed to be claimed as deductions under Section 80C of Income Tax Act, 1961.

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