What
is ELSS?
ELSS schemes function in accordance with ELSS
guidelines
issued by CBDT under Section 80C of the
Income-tax
Act, 1961 to provide tax savings on
investments in equities.
The amount you invest in ELSS is deducted
from your taxable income.
This way, you lower the amount of income
tax you need to pay.
The ELSSS Advantage
For the uninitiated, ELSS is a type of mutual
fund
Investment that qualifies for tax deductions. It
is like any
other mutual fund, but invests at least 80 per
cent of its
assets in equity and equity-related products to
qualify
for tax deductions under Section 80C of the
Income-tax Act,1961. ELSS schemes are
typically open-ended. Investors can subscribe
to the fund on any day. These investments come
with a
Three - year lock-in. With the growth potential
of Indian
equity markets from a long term perspective,
Investments in ELSS to save taxes could just
turn your
wealth creation dream into reality.
Diversification
ELSS being an equity mutual fund is
well
diversified, making it a suitable
option for every
investor looking to save taxes and
also invest in
equities. Diversification is a
simple philosophy
that rests on the fact that all
investments dont
do well simultaneously. An equity
mutual fund
provides instant diversification
because the
money invested by a fund is spread
across
different investments such as
companies from
different sectors across market capitalizations.
Lock-in
ELSS has the shortest lock-in of
three years under
Section 80C of the Income-tax Act,
1961, which
makes it the most liquid among
tax-saving
options. In comparison, the fixed
return PPF has a
15-year lock-in with the flexibility
of partial
withdrawals from year six. One can
borrow
against the PPF, but it still does
not match the
short lock-in that ELSS offers. Even
other tax
savers such as insurance plans have
long tenures
and so does the mandatory provident
fund
deduction. If liquidity is priority
while saving tax,
ELSS is a go-to option.
Flexibility
There isa natural convenience built
into investing in
ELSS: You can invest by filling up a
simple form or
even online with direct debit from
your bank account.
Like other mutual funds, you can
invest diligently
through SIPs, which help you stagger
your
investments. Most importantly, you
can invest small
sums through the year instead of
investing large sums
at one go. Likewise, at the time of
redemption, you
need not redeem all the units after
the lock-in, you can
cash-in as much as you need and let
the rest stay invested.
Equity
Exposure
Compared to other options available
under Section 80C of
the Income-tax Act, 1961, ELSS is
the only equity-oriented
tax-saving option. This is perhaps
the most underrated
benefit of ELSS, especially when
taken into account
the fact that equity is the only
asset class that beats
inflation in the long run and builds
real wealth. This
factor alone makes the case for ELSS
that much
stronger than other available
options. Of course, like
every other equity instrument, an
ELSS also runs the risk of
market volatility and loss. Over the
long term, these risks are
reduced.
Taxation
on ELSS
The investments in ELSS of up to 1.5
Lakh in a
financial year qualify for
deductions under Section 80C
of the Income-tax Act, 1961. After
the mandatory three
year lock-in, the gains from the
investments are taxed
as long-term capital gains. Any
dividend income
earned on ELSS investments is
subject to dividend distribution tax.
Transparent
Investments in ELSS are open, in the
sense, each month
the AMC releases the portfolio in
which the fund has
invested for one to know the type of
stocks which their
investments are in, the sectors, and
the exposure in
debt and cash. Mutual funds are
regulated by the
stock market regulator SEBI, which
mandates the
release of daily NAVs of the fund,
indicating the value of
one's investments each day. While
the lock-in is applicable
1or three years, one can still track
the performance of their
investments in these funds
Professional
Management
ELSS takes the difficult aspect of
managing equity
investing from you. There are scores
of firms and
sectors to track and several factors
that impact the
economy and markets. For instance, a
change in
interest rates will impact stock
prices of companies of
certain sectors that are rate
dependent. The role of
professional fund management ensures
you do not
face the task of making decisions.
Mutual funds
employ professionals who manage
investments on a
full-time basis with expert research
resources. The cost
of professional management is
shared mutually among
all the investors in a fund.
Decoding
Savings
Depending on the tax bracket that
you
fall in, the savings on taxes vary
and
range from 7,000 to T47,000 in a
year by
investing in instruments that
qualify u/ss
80C of the Income-tax Act, 1961.
Changes
in savings*
under
different brackets:
R7,800 under the 5% tax bracket
31,200 under the 20% tax bracket
R46,800 under the 30% tax bracket
*Calculated for individuals with age
less than 60. For the 30%
tax bracket, income is assumed to be
less than R50 Lakhs.
|
Working |
|||
|
Tax Bracket |
Income deducted |
Tax Rate |
Tax Saved |
|
5% |
150000 |
5.2 |
7800 |
|
20% |
150000 |
20.2 |
31200 |
|
30% |
150000 |
31.2 |
46800 |
|
|
|
|
|
