Tax saving option

Tax saving option 

Which is better for tax saving

An Equity Linked Saving Scheme (ELSS) is a mutual fund equity scheme, which provides for long-term wealth creation along with tax benefits under Section 80C of the Income Tax Act, 1961. The ELSS also has a mandatory lock-in period of three years.

ELSS or Equity Linked Savings Scheme is a Tax Saving Mutual Fund. It is a category of equity fund that invests a minimum of 80 % of its corpus money in equity and equity-related instruments of various companies. By investing in ELSS, people can enjoy the benefits of both investing as well as tax deductions. Being a tax saving investment option, ELSS has a lock-in period of three years. So, let us look at some of the advantages that ELSS has over other tax-savings instruments which are listed below.

The returns in case of ELSS are higher as compared to other tax saving investment options. For example, the historical returns generated by ELSS are approximately between 12-15%. On the contrary, PPF another tax savings instrument generates a return of 8.1%.

The lock-in period of ELSS is shortest of just 3 years wherein; people can withdraw their investment money any time post the lock-in period. However, in case of PPF, the lock-in period is 15 years while of tax savings FD is 5 years.

ELSS provides with Convenience in investing and redemption which is not that easy in case of other investments. For example, in case of PPF, at the time of redemption, people need to visit the bank personally to invest and earn. While, in case of ELSS, people can invest and redeem their units through online mode in just a few clicks.

People can start their ELSS investment through SIP with a minimum initial investment as low as INR 500.

The returns earned in case of ELSS investments are tax-free wherein; people need not pay any tax on the capital gains. On the other hand, in case of tax savings FD, people need to pay tax on the interest amount earned.

Thus, from the mentioned pointers we can see that; ELSS has its own advantages using which people can do an effective tax planning. Now, let us throw light on SIP. Systematic Investment Plan or SIP is an investment mode in Mutual Fund through which people invest in small amounts at regular intervals. SIP is one of the characteristics of Mutual Fund that helps people to achieve their objectives with small amounts in a timely manner. In addition, by opting for SIP mode people can ensure that their current budget doesn’t get hampered. SIP is available in a number of Mutual Fund schemes to cater the diverse requirements of individuals. Some of the advantages of SIP are listed below as follows.

 Tax Saving Options Lock-in Min. MAX in the zodiac. AMOUNT returns

1 ELSS 3 Year RS500 1,50,000 Market Link

2 PPF 15 years old RS.500 1,50,000 7.9% P.A.

3 NSC 5 years RS.1OO 1,00,000 7.9% P.A.

4 bank FD 5 year warlisle 1,50,000, 6.25% p.a.

5 ULIPs, 5 years old, 1,50,000 market links

PPF - Public Provident Fund, NSC - National Savings Certificate, FD - Fixed Deposit, ULIP - Unit Linked Insurance Plan. The above table is for illustrative purposes only. Unlike PPF, NSC and bank FD, investment in mutual funds is subject to market risks, therefore, performance may not be strictly comparable. PPF rate is effective from 1 January 2020, Ministry of Finance (Government of India); The NSC rate is effective from 1 October 2019; Bank FD rate is till October 10, 2019. Please consult your financial advisor before investing.

1) What is ELSS?

ELSS or Equity Linked Saving Scheme is an equity mutual fund with the dual benefit of saving tax and wealth creation with a lock in period of 3 years. Investment in ELSS funds is eligible for deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.

2) How much tax can be saved by investing in ELSS?

It depends on the tax bracket in which an investor falls. 30% in the highest tax bracket, if the investment in ELSS is Rs. 1,50,000, the investor can save up to 46,800 *. Investments in ELSS are made in the equity markets, given that the returns are higher than most investment options with tax saving benefits in the long run.

3) Should my first mutual fund investment be in ELSS?

Yes, as long as you limit your savings to Rs.1,5 lakh, Under Section 80C, Rs 1.5 lakh, your investment in mutual fund should go to ELSS fund through SIP mode.

4) How long should I stay invested?

When you want to plan for long term goals, you should stay invested for long term as long as possible. The minimum duration is 3 years. However, depending on different life goals in mind, investing for 5–10 years is advisable.

5) In ELSS, do SIPs give better returns than outright investments?

It depends on the market conditions. If market volatility is high, SIP will give better returns than lump sum as you can buy units at a lower cost. On the other hand, if the market volatility is low, SIP will give lower returns than lump sum investment, as you will be buying units at a higher price.

6) Is ELSS taxed?

Returns from ELSS after 3 years will be taxed under Long Term Capital Gain (LTCG).

Mutual fund investments are subject to market risks, read all the documents related to the scheme carefully.

In 20-21, as per the current tax laws, the eligible investor (Individual / HUF) in Equity-linked Savings Scheme (ELSS) will invest Rs. 1.5 lakh. Out of the total amount of Rs. 1,50,000 / - (along with other prescribed investments) under Section 80C of the Income Tax Act, 1961, tax saving of Rs. 46,800 / - shown above is calculated for the highest income tax slab.

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