Invest in ELSS for growth & tax-saving
Written on Monday, November 23, 2015
By Ravindra Mohan Pant
We all are aware that section 80C of the Income Tax Act allows certain investments and expenditures to be tax-exempted. When it comes to tax saving there are a variety of alternatives present today. Without proper investigation, mere investments may not reap best possible benefits. So, one should assess and then invest in any plan which can bring them maximum returns with tax-benefits.
The total limit under section 80C is Rs.1.5 lakhs and under this heading savings schemes like, NSC, PPF and other pension plans come. Payment of life insurance premiums and investment in specified government infrastructure bonds are also eligible for deduction under Section 80C.
What is ELSS?
As we are discussing tax-exemption, it becomes important to bring up an efficient instrument, which is known as ELSS, which has multi-benefits for the investors and may become an ideal choice for them too. ELSS, which is known as Equity Linked Savings Scheme (ELSS) is a diversified equity mutual fund, which has a majority of the corpus invested in equities. Since, it is an equity fund, returns from an ELSS fund, reflects returns from the equity markets and investing in this for a long-term and can give better returns when compared to other asset classes over the long-term.
ELSS proposes both dividend and growth options to the person investing in them. The growth option has the potential to generate higher returns; the Investors get a lump sum on the expiry of 3 years in the growth schemes. On the other hand, the dividend option provides a periodic income to the investor, whenever the dividend is declared by the fund, even during the lock-in period.
The best thing about ELSS is that it provides an opportunity to grow money and at the same time also qualifies for tax deduction of up to Rs.1.5 lakhs under section (u/s) 80C of the Indian Income Tax Act. This means that the investor has the upper hand when he goes for this scheme.
ELSS vs. other tax saving instruments
The lock in period of ELSS fund is much lower when compared to other traditional tax saving instruments like, National Savings Certificate (NSC) Public Provident Fund (PPF), and bank fixed deposit. When ELSS has a lock-in time period of 3 years, PPF investments have of 15 years, NSC investments are locked in for 6 years, and bank fixed deposits are also eligible for tax deduction when locked in for 5 years. Only ELSS has the shortest lock-in period of three years among all, which is also the shortest among all tax saving options under section 80C.
An investor, when invests in other options, withdraws the money whenever he/she gets good returns. Unlike this, ELSS prohibits this practice because it has a very short lock-in period, which will prohibit the investor from premature withdrawal. This eventually will lead to help the money grow better.
Benefits of investing in ELSS
Saves Tax- When you invest in ELSS Mutual Funds, you are suitable for tax exemptions up to Rs.1.5 Lakh u/s 80C.
Grows Money- ELSS helps you to grow your money. Since, ELSS mutual funds invests in equity related instruments managed by professional fund manager, it has the potential to provide better long-term capital gains when compared to other instruments.
Liquidity -There is 3 years of lock-in period in ELSS mutual funds is the shortest among all tax-saving options under Section 80C. In ELSS, you are forced to keep your investment for a minimum of 3 years which eventually helps in growing the money.
Regular Savings- Investor is now secure from making any last minute hasty lump-sum investments in order to save tax. One can plan effectively and invest in ELSS through the SIP (Systematic Investments Plans) route.
Finally, we can say that the blend of equity and tax-saving makes ELSS funds a perfect investment for all types of investors, but one needs to bear in mind that the returns of the ELSS schemes are determined by the performance of the equity market.