What is Equity Linked Saving Scheme (ELSS)?
by Rajeev Pathak
Today, we will discuss What the Equity Linked Savings Scheme (ELSS) is. How it scores over other instruments as a tax-saving option.
Photo courtesy: Advisor Khoj
There are many tax-saving investment instruments available under Section 80C of the Income Tax Act, 1961. The most popular of them are PPF, Insurance Policies, NSCs, Bank’s Term Deposits & NPS.
Being a banker myself, I too invested in Bank’s Term Deposit for few years
in addition to ELSS. In the initial years, I also used to purchase NSCs and LIC
Policies. But, now times have changed. Equity culture has roped into the minds of
Indian investors.
Today investors have access to information. Now, they compare various options available to them to earn better returns over and above tax-saving. Moreover, a majority of the working population is young, they are mentally prepared to take a little more risk for a better return.
What is Equity Linked Saving Scheme (ELSS)?
Equity Link Savings Scheme
(ELSS) is a mutual fund scheme. Its objective is to generate better returns
over a long period. To encourage investment in equities, Govt. has provided tax
incentives to investors of ELSS. Investment up to Rs. 1,50,000/- is eligible
for deduction from taxable income under Sec. 80C and one can save on tax up to
Rs. 45,000/-,(plus saving on surcharge, cess & other charges) based on his
/ her tax-slab.
There is a lock-in period
of 3 years in ELSS. However, it is advisable to stay invested for a longer
period to fetch better returns. One can join the fund any time and SIP
(Systematic Investment Plan) is also available wherein one can invest at a fixed interval.
As regards, Risk factors, the fund’s capital is invested in the equity market which is prone to volatility. So,
there are no certain returns guaranteed. But, it is established that equity
investment has generated better returns over a long period. To
overcome this risk, it is advisable to go for SIP, so that cost of investment
is averaged out over a period.
The foremost attractive
feature of ELSS is that it provides EEE (Exempted-Exempted-Exempted) tax
benefits to investors. It means the amount we invest is deducted from our
taxable income. Secondly, whatever Dividend, we get from this investment is
tax-exempted and finally, when we get our money back on redemption, that is
also tax-exempted.*
The minimum investment amount
is Rs. 500/- and there is no maximum limit. However, tax benefit is limited to
Rs. 1,50,000/- in a financial year.
The following 3 features make ELSS have an edge above other instruments.
Shortest lock-in period:
As one may observe from above the Lock-in period in ELSS is 3 years against 15 years in PPF, 6 years in NSC, and 5 years in Bank’s Term Deposits. Though it is advisable to stay invested for a longer period, the option to redeem is available after 3 years.
Market-linked Return:
As the money is invested
in the equity market, the possibility of a better return is much more in a long run.
Remember, funds are managed by experts. One has to take risks to earn more in
comparison to fixed-income traditional saving instruments. Following is the SIP Performance of some
of the Tax Saving Schemes :
Scheme Name 3
Years 5 Years
Birla Sun Life Tax Relief ‘96 11.42% 17.66%
ICICI Long Term Equity Fund 24.83% 14.38%
Franklin India Tax Shield 9.69% 15.65%
HDFC Tax Saver 7.82 13.37%
L&T Tax Advantage Fund 17.28% 17.94
Sundaram Tax Saver 17.1% 17.00%
Tax benefits:
As explained above, investment under ELSS provides an EEE tax benefit. PPF though provides the same tax benefit, duration is 15 years and only a certain portion is allowed to be withdrawn after an initial period of 6 years. Interest earned on the bank’s Term Deposit is taxable. Moreover, rising inflation nullifies post-tax interest income.
*Please remember that tax laws and provisions are subject to change from time to time. Please check for prevailing laws at the time of investing.
We may observe from above that it is prudent to invest in ELSS to save tax and also to earn tax-free better returns out of our investments. So, hua na Safal-Nivesh. तो हुआ न सफल - निवेश.
Comments
Post a Comment