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ELSS scores over other tax-saving options
Published On , 21 Mar 2018 By TOI
With the financial year-end just around the corner, it’s high time to plan one’s investments to save tax, in case it is still on your to-do list. Ideally an investor should eliminate such pressure by simply planning these investments as early as possible during the year.
One has a plethora of products available under section 80C to save tax. ELSS (Equity linked saving scheme), as the name suggests, is an Equity scheme with mutual funds. It is similar to other Equity schemes but with a lock in period of three years. With falling returns in traditional tax-saving instruments such as Public Provident Fund (PPF), Tax-Saving Fixed Deposits and National Savings Certificate (NSC), it makes sense to invest in ELSS. It is the only product that offers Equity exposure and has potential for attractive long term returns with lowest lock-in-period of three years. Among other investment options, Public Provident Fund (PPF) has a minimum lock-in of 15 years with conditional withdrawal before maturity. Tax-Saving Fixed Deposits and National Savings Certificate (NSC) are locked in for a period of five years. Life insurance policies are also taken generally for more than 10 years, with a minimum lock in of five years.
To invest in an ELSS, one can either make a lump sum investment or do a monthly SIP (systematic investment plan) or do both. One can claim deduction of up to Rs 1.5 lakh of investments in ELSS, although there is no upper limit for investment. Like in other mutual fund schemes, ELSS funds also come with a growth and dividend option. In the growth option, the investor gets a lump sum on redemption, whereas in the dividend option there is a regular dividend income as and when a payout is declared by the fund. There is no compulsion to redeem after expiry of lock in period and an investor can continue in the scheme and benefit from long-term growth.
ELSS category has the potential to offer superior post-tax returns as compared to other options available under Section 80C. As of March 8, 2018, the ELSS category has delivered annualized returns of nearly 8.4% in last three years and 18.2% in last five years, with highest in the category being almost 12% and 22.3% in last three years and five years respectively. The safer options available under Section 80C mostly offer much lesser returns. However, as is the case with all mutual fund schemes, there’s no guarantee of any fixed returns.
If the budget proposal to introduce tax of 10% on long term capital gains of over Rs 1 lakh goes through, ELSS funds would also attract LTCG tax of 10% on redemption. Still, within the basket of Section 80C, ELSS will continue to have higher returns, shortest lock-in period and a low cost structure when compared to various tax-saving investment options. Considering the long term return potential of equities, ELSS will remain the best investment option for long term investors who are looking for decent risk-adjusted returns with tax-saving benefits. Equities as a long term saving instrument has delivered good returns and the funds can remain invested for a longer period as per the investment Goal. Lastly, instead of waiting for the year end, investors should invest at the beginning of the year via SIP route and enjoy real benefit of disciplined investing.
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