ELSS for Tax Savings

When I meet my clients, one question which I often get asked is “I pay lot of taxes every month. How can I save taxes legitimately?” Financial Radiance is proud to be associated with Chalo Niveshak initiative – one nation one brand for financial advisors. Given below is the blog written by Chalo Niveshak on this topic. My experience has been that a lot of times, under the pressing timelines of providing the proof to income tax / HR department, this investment gets done in a hurry. A bad investment can have a very long term impact on wealth creation. I have written an article previously on boosting your financial net worth which you may also want to read. This blog provides a comparison of various options available under Section 80C.

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ELSS has emerged as most popular option of investment to save the tax under Section 80C of Income Tax Act among other options like Bank FD, PPF, NSC & NPS. ELSS is an open-ended Equity Mutual Fund scheme, which offers high returns and tax savings also. Features of the scheme make it the most easy and convenient investment option.

ELSS VS Other schemes:

The comparison of ELSS with other schemes is furnished in the below table:

Scheme

Lock-in period

Indicative returns in 5 years (not guaranteed)

Risk

ELSS 3 Years 17-20% (market driven) High
BANK FD 5 Years 6.50-8% Low
PPF 15 Years 7.60%(presently) Low
NSC 5 Years 8% Low
National Pension Scheme (NPS) Till retirement Market driven Moderate

The return on ELSS depends upon the stock market conditions. However past performance of ELSS funds show the return of as high as 20% over 5 years. One can expect a better return in long run. The lock in period is also minimum in case of ELSS. Though the risk attached to ELSS is high, yet it is worth to invest.

Operational Convenience:

ELSS offers the convenience of both in investment and in operations. One can invest a lump sum or through SIP also. It is recommended to invest through SIP as it averages the cost of investment. ELSS units could be held both in physical and Demat form. Documentation is also simple and minimum. PAN card and Aadhar card are required for opening of the account. Once your KYC is registered with Central KYC registry, you need not to furnish KYC documents every time.

ELSS offers both Dividend and Growth options. One can opt as per his requirement. Growth option offers the advantage of compounding, which results in phenomenal growth in the investment.

Tax Implications:

– Investment in ELSS up to Rs 1.50 lakhs in a financial year is exempted from income tax under Section 80C of Income Tax Act. It gives an income tax rebate of Rs 46,800 in the highest tax slab i.e. 30%.

– Dividend received in ELSS is also not taxed in the hands of investors. Under Growth option also income up to Rs 1 lakh is exempted under the Income Tax Act. Beyond Rs 1 lakh it is liable for tax @10% only.

– Tax provisions also make ELSS more attractive than other schemes.

A comparative chart is furnished below:

Scheme Tax Implication
ELSS Exempted up to Rs 1 lakh under LTCG
Bank FD Interest taxable
NSC Interest taxable
PPF Interest not taxable
NPS 20% of maturity amount is taxable

The above comparison shows that ELSS is the most tax friendly.

The tax benefit is available to both Resident Indian and NRIs.

Dual Advantage:

ELSS offers the dual advantage of Wealth creation and a Tax benefit. Tax benefit enhances the value of effective return on investment.

Other Advantages:

ELSS has certain advantages over other schemes. ELSS enjoys the following distinct advantages of MF :

1. Mutual Funds are primarily working under Securities and Exchange Boards of India(SEBI). MF are subject to various statutory compliances.

2. MF are also subject to various provisions of RBI, Income Tax and other Security Laws.

3. MF are managed by professionals. Each fund has a separate fund manager who is responsible for the performance of the fund.

4. MF have diversified portfolios. They do not invest in a particular sector. They spread their risk to various sectors. So that performance is not impacted due to slow down in one sector.

5. MF have transparency in their functioning. They also follow the highest level of Corporate Governance.

6. MF offers easy liquidity. In ELSS one can exit after the lock in period of 3 years is over. If one wishes to continue he may continue also.

7. One can monitor the performance of the ELSS personally. The performance of the fund (NAV) is declared on a daily basis on the website of the fund.

8. MF have in house research facilities. They also avail the services of professionals for taking investment decisions. This helps in taking right investment decision in right time and maximizing returns.

9. The maintenance cost which also called as Expense Ratio is very low. It ranges from 0.5 to 1.00%. There are no hidden charges also.

10. ELSS offers flexibility in investment. People from every walk of life can invest in ELSS as per his tax requirement.

11. Investment in ELSS is more stable and not much affected by market fluctuations.

ELSS is an essentially a Tax saving scheme with the potential of creating wealth in a long run. The scheme features make it a Smart investment.

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