Under tax laws, savers have a complete buffet of tax saving instruments like Life Insurance, Public Provident Fund (PPF), tax-saving fixed deposits, National Savings Certificate (NSC), and Equity-linked Saving Scheme (ELSS). Yet, in reality, individuals often make wrong investment decisions with their tax-saving investments. For most people, the investment that should make the most sense is an ELSS. For many beginner investors, an ELSS is an excellent gateway avenue to reap the benefits of low-cost equity investing, high tax-saving and shortest lock-in. Read on to know why.
Simple and straight
While tax planning may seem to be a difficult process to understand at first, mutual funds offer you a very simple way to get tax benefits. All this is done keeping in mind that you can make the most of the potential of the equity markets. So, an Equity Linked Savings Scheme (ELSS) is an open-ended equity mutual fund that helps you save tax and also gives you an opportunity to grow your money. It qualifies for tax exemption under section 80C of the Income Tax Act.
When you invest in certain schemes like ELSS, PPF, tax-saving bank FDS etc. you can claim up to Rs 1. 5 lakh as the total deduction from your gross total income in a financial year under the Section 80C. This means a person earning a gross income of Rs 7.5 lakh, can reduce their taxable income to Rs 6 lakh by using ELSS. Naturally, you will save a lot on tax due to reduced taxable income.
You can argue that so many avenues can save tax, then why choose ELSS? The truth is along with the tax deductions, an ELSS offers you the opportunity to grow your money by investing in the equity market. No other avenue has the potential to deliver the returns that ELSS can.
In the last 5 years, the average return of ELSS fund category is 18.7% annually. As you can guess, there is no other section 80C tax-saving avenue that can save tax and simultaneously offer you such high returns.
You can argue that apart from ELSS, PPF too has given good returns. While it is true that PPF gives better than bank FD returns, but PPF has hardly delivered double-digit % returns in last 10 years. With returns in single-digits (8%), PPF cannot match the tax and return efficient returns that ELSS offers. Also, PPF comes with a 15-year lock-in period compared to just 3 years for ELSS.
5 points in favour
For a normal individual earning a salary, ELSS fits perfectly with the requirements. There is no hassle and one can do investments in a few clicks.
Firstly, ELSS is easy to invest. You can invest in best performing mutual funds or use the recommendations of a registered investment adviser.
Two, ELSS investments are very easy to track. One can even track and monitor your ELSS investments 24/7 365 days a year.
Three, ELSS investments are easy to withdraw. In most cases, you can withdraw anytime in just a few clicks with no paperwork after the lock-in period is over.
Four, online portals today allow one to invest in ELSS in a paperless way by using some basic ID proofs. Sign up, complete your KYC and invest online in less than 10 minutes.
Five, ELSS investments are for your tax saving purpose. The investment proof for HR is easily available. You can get your 80C investment proof instantly and submit to HR then and there.
Conclusion – Smart individuals should allocate the maximum amount of section 80C investments in ELSS. Unlike most other avenues, ELSS allows you to invest in a disciplined way by doing systematic investment plans or SIPs. In this way, every month a portion of your salary can be invested automatically by direct bank debit mandate. At the end of the financial year, there will be no tension or hassle for making lump sum investments. Given the high return potential, shortest possible lock-in and benefit of getting the tax benefit, ELSS is the most tax and return efficient way to cut tax outgo and grow your wealth over the long-term.
*(Author is Founder and CEO of Right Horizons. An ICFAI Business School alumnus, Mr. Rego worked at Wipro Tech for 7 years, before he plunged into the entrepreneurial journey. He founded Right Horizons, a financial planning and advisory company, in 2003, a time when wealth management was at very nascent stage in India. His objective; help others achieve their financial goals. Today under his stewardship, Right Horizons manages more than Rs.800 crores of AUM and created a client base of +1000 customers across pan India.)