A lot of tax payers and investors today a feel a sense of contentment post budget presented by the Modi government. The Finance Minister managed to address various issues and challenges facing the economy.
He also managed to touch the long-unfulfilled wishes of the tax payers. One of the most eagerly awaited part of the budget is the one on taxation and this year there have been multiple good news for the average tax payer on the streets. One of the positive changes has been the increase on the section 80C limit. In this article we would talk about how you can make full use of this section to save the maximum tax possible using one of the most popular products under it – ELSS.
Section 80C:
Before we start talking on ELSS, let us know more on section 80C. The section 80C is a section that offers permissible deductions from Gross Total Income of the assessee as part of Chapter VI-A, i.e., sections 80C to 80U. The total amount in this cannot exceed gross total income of an assessee excluding short term & long term capital gains. Deduction under section 80C is available only to an individual or an HUF. It allows certain investments and expenditure to be deducted from total income up to the maximum of Rs. 1,50,000. The limit is on your own discretion and it is not mandatory to invest full Rs. 1,50,000. The amount was recently increased from 1 lakh in the last budget. The additional amount of 50,000 will give more money in hands of investors who have been hit by high prices. Looking at it as how much you will stand to lose if you are able to meet only Rs. 1lac instead of Rs. 1.5 lacs, if we assume that you are in tax bracket of 20%, then the loss will come to Rs. 50,000 * 20.60% = Rs. 10,300. If you are in 30% tax bracket, loss will be Rs. 15,450.
ELSS :
The ELSS is acronym for Equity Linked Savings Scheme – a diversified equity fund with tax savings feature. ELSS invests primarily in equity stocks spread across different sectors and different market caps i.e, large cap, small cap, etc. It is thus a less risky way to invest into the market especially with the lock-in period which ensures that investments are made for long term. ELSS has been included in 80C section with lock-in to encourage people to participate in the equity markets and benefit from it over a long-term horizon. Within all the options available under section 80C, it is the only one that offers a pure equity exposure. If you can take some equity risk as part of your overall portfolio, the ELSS is the most attractive tax-saving instrument today.
Salient features of ELSS:
Only pure equity instrument that offers the highest return potential in long-term. Least period of lock-in of 3 years compared to other avenues under 80C. Compare this with PPF which is a 15 year savings plan and NSC which has a 6 year lock-in. Less risky way to invest in equities in markets compared to direct buying. Enjoy advantages / benefits of it being a mutual fund scheme Flexibility to invest small amounts through an SIP.
How is Tax saved?
Under Section 80C, only Rs. 1.5 lakhs of investments qualifies for tax benefits though you are free to invest any amount you desire in ELSS. Your gross income is reduced by the amount you invest in the scheme. The amount of savings made under section 80C is dependent on two factors:
- The amount you invest / spend for instruments / heads covered
- The tax-slab applicable to you
The following table best enumerates the amount of tax that can be saved if one invests in ELSS
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If you are paying a tax of 30.9% you can save upto Rs. 46,350/- on an investment of Rs. 1.5 lakhs or more in ELSS. With additional 50,000, investors can now save additional 15,450 of tax outflow in FY 2014-15.
Why ELSS:
The minimum investment amount is very low – mostly only Rs. 500. Historically, provided better returns compared to other instruments like NSC, PPF and ULIPs. In the last 3 years, about 47 schemes had delivered an average category return of about 16.5%*. Earnings /profits earned after the lock-in period is completely Tax-Free as there are no long term capital gains on equities Investors in ELSS under Dividend Payout Option have the advantage of getting Tax Free gains even during the lock-in period of 3 years. 3 year lock-in period brings discipline in investments. It also gives the Fund Manager the freedom to invest in strong companies with long term growth potential. Thus, ELSS schemes can potentially deliver better performance (in terms of returns) than even diversified equity schemes. How much to invest? Typically, you should aim to make the most of the section 80C limited of-course to the amount of taxable income that you have. A maximum of 1.5 lac of deduction can be sought. The full investment in ELSS can help you save about 46,350% of taxes if you are falling in the highest tax bracket and 15,450 if you are in the lowest tax bracket.
If you are already having home loan, life insurance policies, there would be some amount already eligible for deduction. Work out how much amount has already qualified for deduction before making any new investment decision. Deduct this amount from 150,000 and the balance amount can be invested in ELSS at your discretion. In case you need to know more about tax planning, you may always consult your financial advisor. ELSS Investment can be made in form of lump-sum or even SIP, given the sufficient number of months remaining in the financial year till March 2015.
Conclusion:
The ELSS is without doubt the most attractive tax saving avenue available to investors who can carry some degree of risk in their portfolio. With the additional 50,000 being provided under section 80C, it becomes even more attractive. Investors can do well to calculate how much amount remains available for deduction. Now is also the right time to start planning for ELSS either with lump-sum or SIP or both. It won’t be smart that loose money by paying taxes with the 80C section under-utilised or wait till end of the year to start the process.