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ELSS score over other competing tax saving investment options
Published On , 15 Apr 2018 By TOI
People who need to invest in approved financial products to save on taxes often prefer to rush to invest during the last few months of the financial year, especially during the January- February-March of every year. Financial advisors and planners say that this is not the best way to invest or put money in financial products to save on taxes.
The process to save taxes should start at the beginning of the financial year and continue through the year, they say. This way, for one, there is no extra burden on your finances at the end of the year. Secondly, such a year-end process also helps one to inculcate investment discipline. There are several financial products in which you could invest or ones you could buy to save on taxes. Among those are Equity linked savings schemes (popularly ELSS), national pension scheme (NPS), public provident fund (PPF), Tax Saving bank fixed deposits, life insurance plans, pension plans, national savings certificate (NSC) etc.
According to financial advisors and planners ELSS, floated and managed by mutual fund houses are among the best Tax Savings options available in the market. As the name suggests, ELSS are diversified Equity schemes which are suitable for long term investment. In addition to Tax Savings, they also offer capital appreciation.
An ELSS is just like any other Equity scheme, but they come with a threeyear lock-in clause, meaning if you withdraw your money within three years from investment, you need to reverse your Tax Savings and pay some taxes. With the recent trend of falling returns from tax-saving instruments like PPF, Tax Saving FDs and NSC, investing in ELSS is even more preferable than the other competing products. It is also the only product among the Tax Saving instruments that has the potential for attractive long term returns but comes with a lock-in of just three years.
In comparison, PPF has a lock-in of 15 years with conditional withdrawal allowed after the seventh year, while Tax Saving FDs and NSC have fiveyear lock-ins. On the other hand, life insurance plans usually come with a lock-in of five years.
According to financial advisors and planners, opting for a systematic investment plan (SIP) in an ELSS is one of the best ways to save taxes. SIPs inculcate an investment discipline among investors while they help lighten up the burden on investors by spreading out their investments over several months.
These schemes also have the potential to offer superior post-tax returns when compared with other competing products. According to data by Value Research, as of March 31, over the last five years, the ELSS category has delivered an average annual return of 19.1% while in the last three years these funds have given an average yearly return of 10.9%. The returns by its competing products have been in single digits.
Financial planners and advisors say that even after the imposition of long term capital gains of 10% on capital gains of more than Rs 1 lakh which applies to ELSS funds also, these products still score over its competing products in terms of potential long term return. Financial planners and advisors say that one of the reasons behind superior returns by ELSS is that given the three-year the fund manager doesn’t have to bother much about outflows and he/she could concentrate on fund management with a long term view.
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