About ELSS:
ELSS means Equity Linked Savings Scheme. ELSS as the name clearly suggests
is a savings scheme linked to equity markets.
Key Features of ELSS are:
- ELSS is a fund with a lock-in period of 3 years.
- It gives an investor tax benefit
- Investment has to be for long term, any expectation of short term gains
is not appropriate.
- Involves a little bit of risk because of equity allocation.
Exemption from night mares:
All investors constantly track SENSEX and NIFTY and judge their investment’s
NAV to these returns and try to speculate. But this is not the right way to
keep invested in the market. The investor should not be worried about daily
ups and downs in the market but should follow the investment philosophy of staying
invested for a long term and ELSS helps serving this cause by locking in the
money for three years.
Tax Benefit:
Upto March’31,2005 an investor could claim only rebate under Section 88
if invested in ELSS and the maximum amount that could be invested in ELSS was
only Rs.10,000/-.
But from March’31,2006 the investment limit in ELSS has been increased
to Rs.1,00,000/- and this entire investment is eligible for deduction under
sec 80C of Income tax Act,1961.
Revised Tax Slabs for the FY’08-09:
| Upto Rs. 1,50,000
- Nil
|
| Rs. 1,50,001 to Rs. 3,00,000 - 10% |
| Rs. 3,00,001 to Rs. 5,00,000 - 20% |
| Above Rs. 5,00,000 - 30% |
Case I: Resident Individual who does not invest in ELSS
If your income is Rs. 3,00,000 for financial year ending March’31,2009,
Then, Net taxable income: Rs.3,00,000
(-) Income exempt : Rs.1,50,000 (upto Rs.1,50,000 NIL)
Rs. 1,50,000
Therefore the tax payable is: Rs.15000( 10% tax on Rs.1,50,000)
(+) Education Cess@3%: Rs. 450
Rs.15,450
Case II: Resident Individual invests in ELSS:
Now if you invest Rs 1,00,000 in ELSS then the taxable income would be:
Net Taxable income: Rs. 3,00,000
(-) ELSS investment Rs. 1,00,000
Rs. 2,00,000
Income exempt from Tax as per slabs: Rs. 1,50,000
Therefore Tax has to be paid on the amount:
Rs. 2,00,000
(-)Rs.1,50,000
Rs 50,000
Tax payable: 10% on Rs.50,000= Rs. 5000
(+) Education Cess@3%= Rs. 150
Rs. 5150.
The above calculation shows a pure saving of Rs.10,300 after ELSS investment (in
Case II) as compared to Case I
Other tax saving schemes also show the same benefits but when it comes down
to returns ELSS wins hands down.
Other tax saving schemes v/s ELSS. And the winner is…..
| Parameter |
PPf |
NSC |
ELSS |
| Returns |
8% |
8% |
Market linked* |
| Interest Receipt |
On Maturity |
On Maturity |
Depends on Performance |
| Tenure |
15 Years |
6 Years |
Minimum 3 years |
| Tax Benefits |
Sec 80C ,sec10 |
Sec 80C |
Sec 80C |
| Minimum Investment |
Rs 500 p.a. |
Rs 100 |
Lumpsum: Rs 5000/- |
| Maximum Investment |
Rs 70,000 |
Rs 1,00,000 |
No Upper Limit |
| Monthly Plans |
N.A |
N.A. |
SIP : Rs. 500/- |
……ELSS.
*25%-40% return on an average in last two to three years
Beneficial to Investors and Fund managers:
There are certain groups of people who are scared of investments into Equity.
But history shows that none of the investors who have put their money into ELSS
have lost money and most of the years Tax saver funds have been the front runners
in terms of returns to investors.
In case of plain vanilla open ended equity funds, one can put money today and
withdraw tomorrow which makes life of fund manager very difficult but in case
of ELSS the fund manager can stay invested even if the sentiment is bearish
in short term because of the clause of 3 year lock-in period and take advantage
of long term compounding benefit
Blessing in Disguise:
Your invested money is LOCKED for a period of 3 years. i.e., Once invested
in a Tax Saver fund, your money cannot be taken out for a period of 3 years.
But this is a blessing in disguise, because Tax Saver funds generally yield
healthy returns during a 3 year period.
Conclusion:
Persons who are looking for Capital Appreciation and Tax - Benefits amounting
to Rs.1,00,000/- must look towards investing through ELSS.
