Its tax saving season and market is flooded with different type of tax-saving products. The hottest among them are the infrastructure bonds, long-term fixed deposit schemes, NSC and PPF’s. There are a lot of bond issues currently available and a lot many will hit the market till March-end. These products by nature do not provide above average returns to investors. Investors should be thankful to god if they get returns above the prevailing inflation which too is pretty difficult. In infrastructure bonds, you get tax exemption on initial investment of R20,000; so investment beyond this amount is not at all recommended.
With options like fixed deposit, NSC and PPF, liquidity factor comes into picture as the lock in period is very high. The above instruments are pure saving instruments and it’s a sin to think about capital appreciation with them.
So are there better tax-saving instruments available in market which even provides an opportunity of capital appreciation? Do not lose hope as there is one pretty good investment avenue which is equipped to provide both tax savings and capital appreciation. The instrument we will be discussing is Equity Linked Saving Scheme (ELSS). I hope you do not fear equities and your risk appetite is on the higher side.
What is ELSS?
Equity linked savings schemes (ELSS) are equity-oriented mutual fund schemes with an added advantage of tax saving under different sections of the Income Tax Act. Asset allocation is tilted towards equities without default. These schemes follow the theme of mutual funds but Investments up to R1 lakh in ELSS funds are eligible for deduction from taxable income.
Key Features
ELSS refers to equity linked saving schemes which is a type of Mutual fund which provides investors tax exemption under Section 80C. Some of the important features of ELSS are as follows
These are equity-oriented mutual fund schemes
Multiple ways of investment (lumpsum/using SIP mode)
Asset allocation towards equities can go in the range of 80 to 100%
As the allocation is biased toward high-risk-high-return assets like equity, the main objective of such funds is capital appreciation
Lock in period of three years
Tax exemption under Section 80C up to R1,00,000
Tax Benefit attached to ELSS
When you invest in ELSS you are eligible for following tax benefits
ELSS you are eligible for tax benefits under various sections of Income Tax Act
Investment up to a maximum of 1 lakh is eligible as deduction from taxable income under section 80 C
Capital gains which you get from the investment on redemption are tax-free under Section 10(38)
While holding the scheme the income you receive in the form of dividend is tax free under section 10(35) of Income Tax Act.
Negative feature of ELSS
Even though this product has great capital appreciation potentials together with tax benefits, there are few negatives too which one should keep in mind before investing. The main negative features are:
Lock in period of three years makes it illiquid in initial years
Returns on ELSS are not fixed and purely depends on the stock market performance
Investment Rationale – Why it is better than other investment options
Although ELSS has a lock-in period of three years, it’s advisable to invest in this scheme as the lock in period is still smaller than other tax-saving schemes like infrastructure bonds, long-term fixed deposits, PPF and NSC.
The performance of ELSS is linked to the market and it might sound risky to conservative investors, but the lock in period of three years comes to their rescue. We all know that in long run, equity investment is the one which gives best returns. So if you keep your money parked for three years, there is a bright chance that you will be sitting at handsome returns.
With other options you are at loss from both the sides. You have a longer lock-in period and there is an upper cap on the returns. Taking direct exposure in equity is not recommended if you do not have enough time for research. These funds are managed by experienced fund managers and you can gain from their experience.
The other feature which makes ELSS more attractive is the multiple ways of taking exposure. Although it’s recommended to take a lump sum exposure so as to keep the lock-in period fixed, you can also invest via SIP route.
In case of SIP your lock-in period of three years is counted from the date of investment. There are a lot of funds and there is enough data regarding them using which you can judge the performance.
Post analysis you can choose one of the best managed funds. Availability in Demat format makes them even more attractive as you are saved from the hassles of paper work.
With options like fixed deposit, NSC and PPF, liquidity factor comes into picture as the lock in period is very high. The above instruments are pure saving instruments and it’s a sin to think about capital appreciation with them.
So are there better tax-saving instruments available in market which even provides an opportunity of capital appreciation? Do not lose hope as there is one pretty good investment avenue which is equipped to provide both tax savings and capital appreciation. The instrument we will be discussing is Equity Linked Saving Scheme (ELSS). I hope you do not fear equities and your risk appetite is on the higher side.
What is ELSS?
Equity linked savings schemes (ELSS) are equity-oriented mutual fund schemes with an added advantage of tax saving under different sections of the Income Tax Act. Asset allocation is tilted towards equities without default. These schemes follow the theme of mutual funds but Investments up to R1 lakh in ELSS funds are eligible for deduction from taxable income.
Key Features
ELSS refers to equity linked saving schemes which is a type of Mutual fund which provides investors tax exemption under Section 80C. Some of the important features of ELSS are as follows
These are equity-oriented mutual fund schemes
Multiple ways of investment (lumpsum/using SIP mode)
Asset allocation towards equities can go in the range of 80 to 100%
As the allocation is biased toward high-risk-high-return assets like equity, the main objective of such funds is capital appreciation
Lock in period of three years
Tax exemption under Section 80C up to R1,00,000
Tax Benefit attached to ELSS
When you invest in ELSS you are eligible for following tax benefits
ELSS you are eligible for tax benefits under various sections of Income Tax Act
Investment up to a maximum of 1 lakh is eligible as deduction from taxable income under section 80 C
Capital gains which you get from the investment on redemption are tax-free under Section 10(38)
While holding the scheme the income you receive in the form of dividend is tax free under section 10(35) of Income Tax Act.
Negative feature of ELSS
Even though this product has great capital appreciation potentials together with tax benefits, there are few negatives too which one should keep in mind before investing. The main negative features are:
Lock in period of three years makes it illiquid in initial years
Returns on ELSS are not fixed and purely depends on the stock market performance
Investment Rationale – Why it is better than other investment options
Although ELSS has a lock-in period of three years, it’s advisable to invest in this scheme as the lock in period is still smaller than other tax-saving schemes like infrastructure bonds, long-term fixed deposits, PPF and NSC.
The performance of ELSS is linked to the market and it might sound risky to conservative investors, but the lock in period of three years comes to their rescue. We all know that in long run, equity investment is the one which gives best returns. So if you keep your money parked for three years, there is a bright chance that you will be sitting at handsome returns.
With other options you are at loss from both the sides. You have a longer lock-in period and there is an upper cap on the returns. Taking direct exposure in equity is not recommended if you do not have enough time for research. These funds are managed by experienced fund managers and you can gain from their experience.
The other feature which makes ELSS more attractive is the multiple ways of taking exposure. Although it’s recommended to take a lump sum exposure so as to keep the lock-in period fixed, you can also invest via SIP route.
In case of SIP your lock-in period of three years is counted from the date of investment. There are a lot of funds and there is enough data regarding them using which you can judge the performance.
Post analysis you can choose one of the best managed funds. Availability in Demat format makes them even more attractive as you are saved from the hassles of paper work.
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