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Here's one lesser-known way to save on tax

By Arnav Pandya

There is an option available for individuals to put their money into Equity Linked Savings Scheme (ELSS) provided by mutual funds where there is a tax deduction under Section 80C of the Income Tax Act. This is a different route that has some distinctive characteristics which the individual must know so that there is an idea about the nature of the investment that they will get. Here are a few factors that will come into play when an ELSS is chosen

Pure equity option:
There are a lot of choices when it comes to making an investment under Section 80C of the Income Tax Act. Most of them are however pure debt options like National Savings Certificate (NSC) or Public Provident Fund (PPF) while some might have an equity element involved like pension schemes issued by mutual funds. In the midst of all this there is an option that is fully equity in nature and this is the ELSS. Here there is a 100 per cent exposure of the individual to equity which is different from the other choices and this is something that the investor will find as a significant factor for their decision making.

Chances of loss:
One of the main considerations for the investor when they are using different options for the tax saving purposes is to see the kind of return that they will end up earning. There will be different choices made based upon the possible returns and this becomes a major point that will distinguish one from the other. When it comes to the ELSS there is a different thing that the investor must consider and this is the extent and the chances of a loss of capital that they could end up with. This is important because it could be that there is a loss of the capital and that too a significant amount which will wipe out the possible benefits that might come in on the tax front and the expected returns.

Tax free returns and time frame:
Among the different choices present for investment most of them will have some tax element that comes into play on the earnings made on the instrument. There are some exceptions to this in the form of interest earned on the PPF or the amount received on the life insurance policies but the amount here will be returned after a long period of time. On the other hand the dividends are tax free in the hands of the investor and even the long term capital gains would not be taxed and hence there is a chance that the entire amount of the returns are not taxable and this comes back to the investor in a short period of time which could be as low as three years.

The investment is suitable for all those investors who are not afraid to take risk for the purpose of growing their money and hence would include a lot of young people who do not have trouble with this kind of situation. At the same time it is also important that the investor realises that there should be an outlook that is greater than the three years that the ELSS will have a lock in. This is necessary as there could be a situation where the investor finds that they do not get the expected situation in this time period. Finally ability to endure large amounts of uncertainty for a longer time period is also essential otherwise there could be a situation where the investor gets tormented for the time period that they have put their money here.

The author can be contacted at arnavpandya@hotmail.com

Also read: What to keep in mind next time you get gift from your boss


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