Feb 13, 2017 03:38 PM IST | Source: Moneycontrol.com

Opt for ELSS for tax savings and also create wealth in long term

ELSS are built to offer benefits of capital appreciation based on equity gains and tax benefits to investors.

Opt for ELSS for tax savings and also create wealth in long term
Moneycontrol Bureau

If you are looking at investing in tax-saving instrument and do not mind taking a little risk with your money, one of the best options under the Section 80C universe of the Income Tax Act are Equity Linked Savings Schemes (ELSS).

So, what is an ELSS? These are diversified equity funds floated by mutual funds with the aim of attracting investments for tax-saving purposes.

As a tax-saving instrument, ELSS compete with several other instruments under Section 80C through which an investor can avail the benefit of tax deduction. These include Employees’ Provident Fund (EPF), Public Provident Fund (PPF), life insurance including unit-linked insurance plans (Ulips), bank deposits, National Savings Certificates (NSC), Senior Citizens’ Savings Scheme among others.

ELSS are built to offer benefits of capital appreciation based on equity gains and tax benefits to investors. Not just that, a third benefit of investing in these schemes is that the long term capital gains made through these investment are exempt from tax.

Over and above this, you have the comfort of knowing that your money is being handled by investment experts trained to track the capital market and make suitable equity investments that would give you decent gains in the long run.

The better performing ELSS schemes have given compounded returns of over 20-25 per cent over the past three and five years, which can be considered healthy by any standards. As against this, investment in fixed income instruments such as PPF, 5-year bank deposit will give you annual returns in single digits.

ELSS Tax Benefits

You can invest the entire Rs 1,50,000 permitted under Section 80C into ELSS schemes if you are willing to take on capital market risks to make higher returns that beat inflation by a decent margin.

If you are a resident Indian below the age of 60 in the highest 30 per cent tax bracket and you choose to take advantage of the entire Rs 1,50,000 tax deduction through ELSS, you will save approximately Rs 46,350 in taxes.  

Do not forget that this tax saving comes along with the fact that after a year, your investment gains will also be exempt from taxation.

Investment advisors say that the best way to take advantage of ELSS schemes is through Systematic Investment Plans (SIP) and not through a lump-sum investment. This would enable an investor to average the holding cost through the capital market ups and downs. ELSS are open-ended schemes which are open for purchase all year round.

ELSS funds offer both growth and dividend options. If you opt for dividend option, the dividend received will not be taxed. In case you choose to reinvest the dividend under the dividend reinvestment plan, you will be eligible to claim tax benefits on that as well.

Lock-in period

ELSS have a 3-year lock-in. Thus, you cannot withdraw your money before three years of making the investment. However, though at first glance this might look a negative since you will not be able to use your investment before 3 years, ELSS lock-in compares well with some other investment options under Section 80C. For example, PPF has a lock in of 15 years while for NSC matures in 6 years. Also, the lock in helps in being invested for a reasonable duration to make capital gains.
If you are following the SIP route to investing in ELSS, you must be aware that each SIP instalment is considered as a fresh investment and the three year lock-in kicks in for that portion from the time the investment is made.

Withdrawals from ELSS

After completion of three years of your investment you can redeem your accumulated corpus at the given Net Asset Value (NAV) of the day. Like all mutual funds, units of ELSS carry a certain value based on the size that the corpus has reached.

Who should invest?

However, one must keep in mind that ELSS being heavily invested in stocks carry high risk and the possibility of capital loss if the market does not do well during the holding period. Hence it may not be a good investment option for those closer to retirement. However, the earlier you start putting money in ELSS for tax-saving the greater chances of making good returns by riding out the market cycles.
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