The tax-saving season is coming to an end. For the investors, there is a host of tax- saving products competing with one another to get your attention. However, choosing the right product is not easy in the race against time.
Perhaps, it is just the right time to draw your attention to one such tax-saving product vying for your attention. Known as the Equity Linked Savings Scheme (ELSS) from mutual funds, it is one product that deserves more attention than any other tax-saving product. As an investor, it would be interesting to know more about ELSS and understand how it scores above other tax-savings schemes on offer…
Tax Savings:
Making the most of the tax saving options available to you is very obvious. Section 80C of the Income Tax Act, is a major section where most of the tax savings can be done by an investor. Investments made under section 80C are deductible from the income of the person while calculating tax. Thus, a person can save up to Rs.30,900/- in tax by making full use of 80C, depending upon his/her tax slab. The good news is that there are a host of products that qualify for ‘tax-deductible’ savings Section 80C, which includes…
- Public Provident Fund (PPF)
- Equity Linked Saving Schemes (ELSS)
- National Saving Certificates (NSC)
- Fixed Deposits (5 year period)
- Provident Fund (PF)
- Kisan Vikas Patra (KVP)
- Life Insurance Premiums
- Pension Funds
- Housing Loan (Principal) Repayments
- Infrastructure Bonds
Thanks to the large number of products available under section 80C, you need to understand your options better before your commit your money to any particular option. With these multiple options, for an investor, it makes sense to make the most of this section by not only saving tax but also investing for the better returns. However, quite often this is not the case. The investment decision is often driven by “tax-saving” objective, ignorant of investing side of it.
About Equity Linked Savings Scheme:
An ELSS (Equity Linked Savings Scheme) is a mutual fund scheme investing in equity and equity-related securities. ELSS is similar to a diversified equity fund in terms of their portfolio except the fact that they they have a 3-Year lock-in- period and are eligible for tax-deduction under 80C up to Rs.100,000/- (FY 2010-11).
ELSS scores upon other traditional tax saving investments for the following factors:
- Minimum Lock-in Period: The lock-in Period is of 3 years only which is the least among all the investment products under 80C. After this period you are free to withdraw your entire investment or continue holding it as a long term investment.
- Attractive Returns Potential: There is a strong potential for higher returns as returns are not fixed but market dependent with investments in equity & equity related securities. Equities have been proven to give attractive returns in the long-term over any other asset class.
- Additional Tax Benefits: ELSS enjoys other tax advantages applicable to mutual funds. There is no tax on the dividends declared and also no taxation on long-term capital gains. This makes all the income and appreciation from ELSS tax-free for the investor.
- Choice of Product: There is a lot of choice in terms of selecting from an ELSS scheme being offered by many AMCs. There is choice also for selecting between scheme option of Growth / Dividend Payout or Dividend Reinvestment.
- Convenience: Mutual funds offer huge convenience / flexibility in investing. One can invest through lump-sum / SIP or make a Switch or STP from an existing mutual fund scheme. Further, since mutual funds are now also traded on stock exchange, you can directly buy ELSS online, sitting at the comfort of your home.
The following is the brief relative performance comparison of some of the major tax-saving products.
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ELSS, thus, scores important points over many other tax-saving products. However, one should also understand that the returns are not guaranteed before investing.
Case for Equity Investing through Mutual Funds:
Most of products under 80C are on the debt side like NSC, Bank Deposits, PPF, etc. These products offer assured rates of return. However when you adjust these returns for taxation and inflation, returns would be negative. Thus with negative “real returns” on your investments, you are really not saving but dis-saving in actual terms. With higher inflation rates in recent times, the investment in these products must be made only after careful understanding that you may be actually eroding your wealth. As investors, we should always aim for positive real returns (higher than inflation) after tax. It is only then that we will truly invest for a better future.
One of the most important asset class to beat inflation in long term is equities. It is true that equity returns can not be guaranteed but are market dependent and hence riskier than the dept products. However, once the investment duration is prolonged and the right way of investing is adopted, you can reduce risk to a certain extent without compromising on returns potential. One way of smartly doing so is by investing in equity mutual funds rather than directly investing in equities. Mutual funds, is an ideal investment vehicle for any investor to invest into equities as it offers the important benefits of diversification and professional investment management at least costs. Further still, the Systematic Investment Plan or an SIP in a equity mutual funds reduces the risks and offers a convenient way to invest small amounts of money at regular intervals in any scheme, including ELSS. Thus, equity mutual fund schemes would help generate inflation-beating returns in long run while keeping risks under control.
The advantages of ELSS as an equity mutual fund scheme plus tax benefits of 80C plus its scoring points over other tax saving products, makes it a formidable product to invest and gain maximum out of 80C. The ultimate decision to invest should however be made as per one’s own risk appetite and after understanding all the risks & benefits offered by the investment products. After all, you are investing not just for tax savings but something more…