Tax planning is an integral part of everyone’s financial plan. Section 80C of Income Tax Act, 1961 allows you as an assessee to claim income tax deductions by investing in specific investments. Among the other tax saving options, tax saving mutual funds or ELSS (Equity Linked Savings Scheme) is the most popular tax saving investment option.
In simple words, ELSS is a diversified equity mutual fund that is qualified under section 80C of the Income Tax for tax exemption purposes, offering the dual advantage of tax benefit as well as capital appreciation.
Who should invest in ELSS?
ELSS is apt for all investors wishing to invest in a tax planning instrument. Though there’s no age as such to start investing in it, it’s a good investment tool for those just starting their financial careers as it could help them in shedding their inhibition to invest in the equities via mutual funds in a big way.
As mentioned earlier, ELSS funds are among the best avenues of saving income tax. It’s due to the fact that along with the benefit of tax shield, an investor also has a potential upside of the equity markets. Furthermore, compared to the other tax saving alternatives, ELSS offers a lock-in period of 3 years, the shortest in its class.
What are the key features of ELSS?
An ELSS (Equity Linked Savings Scheme) is a diversified mutual fund that has the majority of its corpus invested in the equities. As it’s an equity fund, the returns from the ELSS fund mimic the returns from equity markets.
Tax benefits: Investment up to INR 1.5 lakh could be claimed under section 80C. One could save up to INR 46,800 in case the assessee falls under 30 percent tax bracket. In case the assessee falls under the 20 percent bracket, he could save up to INR 31,200.
Wealth accumulation: One could create wealth by linking the ELSS fund to one’s long-term financial objectives. By selecting the growth option, one could gain from the compounding and can create the desired corpus.
3 year lock-in period: The ELSS scheme has the shortest lock-in period among all the instruments in its class. When compared to the other tax options such as PPF (Public Provident Fund) that have a 15 year lock-in period or a tax saving FD (Fixed Deposit), ELSS has a lock-in period of 3 years alone.
Inculcates financial discipline: ELSS allows you in investing systematically with as low as INR 500 /month. Ultimately your savings turn into investments. This inculcates financial discipline by nurturing the habit of continuous saving and investing. Since there’s a lock-in-period of three years, in case you start your SIP (Systematic Investment Plan) in ELSS, the returns for the SIP amounts would generate every month after three years of your first investment.
Higher returns: ELSS allows you to ride the growth cycle of the stocks in your ELSS fund. Where savings could give around 8 percent of returns, ELSS may provide higher returns where situations are favorable in the stock market. In a rising economy such as India, an investment in an ELSS scheme with quality stocks could reap higher returns.