If you haven’t invested in a tax saving scheme this season, you can consider investing in Equity Linked Savings Schemes. ELSS is the only equity mutual funds scheme that comes with a tax benefit. However, investors are expected to understand their risk appetite before investing in this market linked scheme. Although ELSS carries a high risk profile, the three year lock-in ensures that investors achieve decent capital appreciation at the end of their investment journey.
What is ELSS?
ELSS is a tax saving scheme under Section 80C of the Indian Income Tax Act, 1961. It is the only mutual fund scheme as of now that comes with a tax benefit. Investors can invest up to Rs. 1.5 lakhs per fiscal year in ELSS and claim tax deductions for the same. Also, the three year lock-in is probably the shortest among other tax saving instruments that come under Section 80C.
Here a simple example to help understand how ELSS can help with your tax woes –
JayaDixit is a senior operationsmanager with a real estatefirm who draws and annual salary of Rs. 13 lakhs. This lands her in the highest tax bracket. Jaya learns about ELSS from a friend and decides to invest Rs. 1.5 lakh in the tax saver fund. Now according to 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1,50,000 in ELSS and claim tax deductions for the same. By investing in ELSS Jaya’s gross taxable income has now come down to Rs. 11.5(13-1.5) lakhs per annum. Also, the three year lock in gives the amount invested an opportunity to accrue interest and might even help her building wealth over the long term.
Why is ELSS a better tax saving scheme than others?
There are several reasons behind why ELSS is a far better tax saving scheme than other schemes that fall under Section 80C. Firstly, it offers flexibility. If you do not wish to continue investing after the three year lock-in, you can withdraw your ELSS fund units. Also, if the ELSS fund you invested in is performing below your expectations then you can stop investing and switch to a better performing scheme. This is far more flexible than other tax saving options where the lock-in period can range anywhere between 5 to 15 years.
Secondly, ELSS has the option of starting a monthly SIP. A Systematic Investment Plan is an easy and convenient way of investing in ELSS funds. All an investor has to do is decide on the monthly investment amount and allow auto debit. After this, every month on a fixed date a predetermined amount is debited from the investor’s savings account and electronically transferred to the scheme. Also, SIP is far more flexible in nature, thus allowing investors to not only save tax but also target their life’s long term financial goals.
Investors are free to change their monthly SIP amount depending on the performance of the scheme. Also, if they continue investing in ELSS via SIP, they might be able to benefit from power of compounding as well as rupee cost averaging. Those who invest in ELSS keeping a long term investment horizon, such individuals generally opt for the growth option. In the growth scheme, the capital appreciation received in reinvested back in the scheme, thus snowballing into a decent corpus. However, if you seek regular income then you may opt for dividend payout option.