ELSS Funds for Tax Saving and why invest in them?
What is ELSS?
Simply put, ELSS is a
type of diversified equity mutual fund which is qualified for tax exemption
under section 80C of the Income Tax Act, and offers the twin-advantage of
capital appreciation and tax benefits. It comes with a lock-in period of three
years.
Why should one invest in an ELSS?
ELSS funds are one of the best avenues to save tax under Section 80C. This is because along with the tax deduction, the investor also gets the potential upside of investing in the equity markets. Also, no tax is levied on the long-term capital gains from these funds. Moreover, compared to other tax saving options, ELSS has the shortest lock-in period of three years.
Beyond Tax Saving
Parameter
|
PPF
|
NSC
|
ELSS
|
Tenure
|
15 years
|
6 years
|
3 years
|
Returns
|
(Compounded Annually)
8.80 % ^ |
(Compounded
half-yearly) 8.60 to 8.90 % ^ |
Not assured dividends/ returns
|
Minimum investments
|
Rs.500
|
Rs.100
|
Rs.500
|
Maximum investments
|
Rs.100,000
|
No limit*
|
No limit*
|
Amount eligible for
deduction under Section 80C |
Rs.100,000
|
Rs 1,00,000
|
Rs 1,00,000
|
Taxation for interest
|
Tax free
|
Taxable
|
Dividends and capital gain tax free
|
Safety/ Rating
|
Highest
|
Highest
|
High Risk
|
* There is no upper
limit on investments. However, investments of only upto Rs.100,000 per year are
allowed to be claimed as deductions under Section 80C of IT Act.
SHORT Lock-in
Instrument
|
Lock-in Period
|
ELSS
|
3 Years from the date of allotment of the
respective Units
|
Bank Fixed Deposit
|
5 Years
|
PO Time Deposit
|
5 Years
|
NSC
|
6 years
|
PPF
|
15 Years (Partial withdrawal after 6 years)
|
Pros and Cons
Like all investment
options; ELSS too come with its share of advantages and disadvantages.
Advantages of ELSS over NSC and PPF
- Main advantage of ELSS is its short lock-in period. Maturity period of NSC is 6 years and PPF is 15 years.
- Since it is an equity linked scheme earning potential is high.
- Investor can opt for dividend option and get some gains during the lock-in period
- Investor can opt for Systematic Investment Plan
Disadvantages of ELSS
Risk factor is very high compared to
NSC and PPF
Tax Advantage
Particulars
|
Without ELSS/ 80C Tax Saving
Investment
|
With ELSS / 80C Tax Saving
Investment |
Gross Total Income
|
Rs.7,50,000
|
Rs.7,50,000
|
Exemption Under Section 80C
|
Nil
|
Rs.1,00,000
|
Total Income
|
Rs.7,50,000
|
Rs.6,50,000
|
Tax on Total Income
|
Rs.80,000
|
Rs.60,000
|
Tax saved on Investment
|
Nil
|
Rs.20,000
|
Illustration of Tax
exemption for a male person less than 60 years in receipt of salary income for
the assessment year 2013-14 (FY 2012-2013).
Suitability
It is suitable for
all types of investors who are not risk averse and need to invest in tax
planning instruments. Though there is no age to get started on an ELSS, it is
good investment to have for those who are just starting their careers as it can
help them shed their inhibition about investing in equities through mutual
funds in a big way.
Caution: Investment
in ELSS carry high risk and any investment decision needs to be taken only
after consulting the Tax Consultant or Financial Adviser.
Content courtesy: SBI MUTUAL FUND
