Planning your taxes is an integral part of your financial planning. Sec 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain investments. One of the most popular Sec 80C investments is in tax saving mutual funds or Equity Linked Savings Scheme (ELSS).
For tax purposes, returns from an ELSS scheme are tax free. You can claim upto Rs.1.50 lakh of your ELSS investment as a deduction from your gross total income in a financial year under Sec 80C of the Income Tax Act. This is an equity diversified fund & investors enjoy both the benefits of capital appreciation as well as tax benefits. An ELSS is a diversified equity mutual fund which has a majority of corpus invested in equities. Since it is an equity fund, returns from an ELSS fund reflect returns from equity markets.
For tax purposes, returns from an ELSS scheme are tax free. You can claim upto Rs.1.50 lakh of your ELSS investment as a deduction from your gross total income in a financial year under Sec 80C of the Income Tax Act. This is an equity diversified fund & investors enjoy both the benefits of capital appreciation as well as tax benefits. An ELSS is a diversified equity mutual fund which has a majority of corpus invested in equities. Since it is an equity fund, returns from an ELSS fund reflect returns from equity markets.
Do a thorough research before you invest in an ELSS fund. You must look at the long term performance of the fund before putting your money in it. Remember to look at the fund details like the fund manager’s investment approach, portfolio of the fund, the expense ratio of the fund & how volatile the fund has been in the past. This type of mutual fund has a lock in period of 3 years from the date of investment. This means if you start a Systematic Investment Plan in an ELSS, then each of your investments will be locked in for 3 years from the respective investment date. Investors can exit ELSS by selling it after 3 years.
Similar to other equity funds, ELSS funds have both dividend and growth options. Under the growth scheme investors get a lump sum on the expiry of 3 years in growth schemes. On the other hand, in a dividend scheme investors get a regular dividend income, whenever dividend is declared by the fund, even during the lock-in period.
Compared to traditional tax saving instruments like Public Provident Fund (PPF), National Savings Certificate (NSC) & bank fixed deposits, the lock in period of an ELSS fund is much lower. While ELSS investment is locked in for 3 years, PPF investments are locked in for 15 years, NSC investments are locked in for 6 years & bank fixed deposits eligible for tax deduction are locked in for 5 years. As ELSS is an investment in equity markets & investing in this for a long term can give you better returns compared to other asset classes over long term. You can also opt for SIP investments, which bring about discipline in regular investing. You can also get income from your investment amount in the lock in period if you opt for dividend schemes.
ELSS is not for risk averse investors. As ELSS investments are per se stock market investments, all risks associated with equity investments pertain to ELSS. So you are better off avoiding ELSS if you do not wish to take this risk. Another disadvantage of ELSS is that you cannot withdraw your funds before the maturity date. Other instruments like PPF & bank deposits permit premature withdrawal, subject to certain conditions.
High inflows into ELSS funds are determined by performance of stock market in general. Also, if an investor gets better tax-adjusted returns from other investment avenues like debt, he will prefer to go for this, as risk is lower. But over a long term, ELSS funds are the best tax saving instruments, especially if you are an investor who can take on high risk. The success of this category of mutual fund depends on the tax treatment it receives under the DTC.
With the financial year coming to a close & sentiments towards equity markets turning positive, investments in ELSS are on the rise, which makes a perfect case for one to consider & have this in your basket while working out personal or investment tax planning in current financial year.
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