ELSS: Not just saves tax, creates wealth too
It is that time of the year when people start thinking actively on how they can catch up on their investments under Section 80C of the Income Tax Act. Section 80C deals with tax break. Presently under this section, a maximum investment of Rs. 1.5 lakh per annum is eligible for deduction from your income. This benefit of the deduction is available to every individual. If you are in the 30% tax bracket, then on an investment of Rs. 1.5 lakh you are able to save tax to the tune of Rs. 45,000.
Several investments qualify under section 80C. Some of the prominent ones are Provident Fund, Voluntary Provident Fund, Equity Linked Savings Scheme, Public Provident Fund, Life Insurance, Sukanya Samriddhi account, Senior Citizen Savings Scheme, Unit Linked Insurance Plan, Home Loan principal repayment, National Savings Certificate, 5-year Bank deposit, Pension funds etc.
In this note, I am going to talk about Equity Linked Savings Scheme popularly known as ELSS.
What is ELSS?
An ELSS is a diversified equity mutual fund scheme. It has a 3-year lock-in period from the date of investment. If your investment in ELSS is through an SIP (Systematic Investment Plan), then each investment will have a 3-year lock-in from its respective investment date.
What are the tax benefits with ELSS?
Your ELSS investment qualifies for tax savings under Section 80C. And this is not the only benefit! Furthermore, there is no tax on the income from ELSS during the investment tenure. In other words, the growth in your ELSS investment/s during the year does not attract tax. And finally, there is no tax on ELSS at the time of redemption. This means that the capital gains tax on ELSS maturity or redemption is Nil. (Update on Taxation at the time of redemption – LTCG Tax was reintroduced in the FY2019 budget. Long term capital gains of over Rs 1 lakh in a financial year are taxed at 10 per cent)
From taxation perspective, ELSS like PPF is one of the most ideal investment as both fall under the exempt-exempt-exempt category (Update: This was the scenario prior to FY 2019). I am keeping the product and return comparison between ELSS and PPF reserved for a discussion in a separate note. Comparisons between ELSS and other qualifying tax savings instrument will follow later.
Why ELSS?
ELSS is one of the most tax efficient investment option like PPF. This in itself is a strong reason to prioritize ELSS for tax savings choice. Other reasons that score in favour of ELSS are as under:
- ELSS investments offer a dual advantage of tax saving as well as wealth creation
- ELSS investments have a shorter lock in period of 3 years compared to other tax saving options
- ELSS investments offer better returns potential to beat inflation compared to other tax saving products
- ELSS investments offer ease of investment as it has option of both lump sum investment and SIP
- ELSS investments are managed by professional experts with an aim to reduce risk and maximize returns
- ELSS investments offer flexibility. SIP in ELSS can have varying investment frequency, e.g. monthly, quarterly, annual. ELSS also offers withdrawal flexibility either in form of lump sum or through Systematic Withdrawal Plan (SWP)
Conclusion
While people make investments to get tax deductions under Section 80C, tax savings should not be their only objective. As far as feasible, each investment decision of yours should be backed by a specific financial objective or a goal. Investment in an ELSS fund can provide solutions to your goals like planning for your retirement, marriage or education planning of your child and likewise. You should discuss with your advisor, on how ELSS is suitable for you and how it can help you achieve your financial objectives.
Email: info@aadi.co.in
Arnab Wealth Advisors
March 2020