Steven Fernandes
With just 4 months to go before the end of the financial year 2013-14, most salaried individuals may have already received the intimation from their HR departments to declare their tax saving investments for the financial year. While for those in the high income bracket and enjoying provident fund benefits, may actually not need to worry as their PF deductions itself may cross the required Rs. 1 lakh limit set under section 80C. For others who are falling short of the maximum limit, ELSS funds can be the right product to invest.
The acronym ELSS stands for Equity linked savings scheme and these funds come with a lock in period of 3 years which is the least lock in period among all tax saving instruments. Most other tax saving instruments come with a lock in period of 5 or more years. That does not mean that one with a 3 year investment horizon and wanting to save tax should invest in these funds. ELSS funds invest predominantly in equities and therefore just focussing on the 3 year horizon may not be advisable as equities are volatile in the short term and usually perform better in the long run. There could be occasional periods when equities have given good returns even in the short term, but then that could be due to purchases done when the markets were trading at lower levels.
The usual tendency could be to make a lumpsum purchase as most are in a hurry to submit the investment proof. Unless your investments horizon is more than 5 years, avoid investing the entire lumpsum at one go, especially if it’s a big amount that you intend to invest. It is advisable to stagger the amount in 2- 3 instalments if you have some more time to submit the investment proofs.
It will help to compare the past performance of some of the ELSS funds to enable identifying the right fund to invest in. Avoid only focussing on just 1 or 3 years performance only and also compare 5 years performance which will indicate ability of the fund manager to deliver over longer periods. Secondly linking this investment with one of your long term goal would help as then it eliminates the tendency to withdraw the money once it completes 3 years, during which time you may or may not earn adequate returns.
Lastly the gains in these funds are tax free as the withdrawals will happen only after the 3 year lock in and hence falls under the long term capital gains section which is at present tax free for equity instruments. So you end up getting double benefit of saving tax on investment as well as earning returns which are again tax free on withdrawal.
The self-employed still have some time left as they can invest till March 2014. They have the best chance to still invest equal amounts each month over the next 4 months
| Period | Axis Long Term Equity Fund (G) | BNP Paribas Tax Advantage Plan (G) | Franklin India Tax Shield (G) | Can Robeco Eqty TaxSaver (G) | ICICI Pru Tax Plan- Direct (G) |
| 1 year | 14.00% | 7.60% | 7.40% | 4.50% | 10.3 |
| 2 Years | 21.90% | 17.70% | 15.90% | 15.20% | 19.7 |
| 3 Years | 10.90% | 7.80% | 6.20% | 5.40% | 5.9 |
| 5 Years | - | 19.40% | 21.10% | 23.30% | 26.1 |
Source: Moneycontrol (Data as on 9th Dec 2013)
As the above data shows, ELSS funds have delivered good returns over longer periods and hence they are still one of the best options that we have for saving tax. All said and done, the future returns may not exactly pan out the way we see it in the above performance data therefore do your due diligence before you invest. As per the Direct tax code draft, ELSS funds are not mentioned as being eligible to claim tax benefits. Therefore till the time the DTC is not implemented, one should use the opportunity to invest in ELSS.
The author is a member of The Financial Planners’ Guild, India (FPGI). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.)
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