A continuously debated topic – should one invest to generate returns or to invest to save taxes? The answer to this is rather simple, you could do both. Yield a good return with tax-saving makes a great combination. Equity Linked Savings Scheme (ELSS) is an extremely valuable scheme. While there are many schemes that are offered to save taxes, ELSS can also be used for wealth creation as it invests in Equities to ensure the desired long-term yields.
ELSS – a Quick Look
• The lock-in period is only 3 years, which is the least amongst all tax-saving instruments.
• Investors can invest in equities and also get their funds managed by professionals.
• Long-term capital gains are relatively tax-free.
• The investors can avail of a tax deduction of up to Rs. 1,50,000 under section 80C of the Income Tax Act.
Mutual Funds have always been beneficial to those who are novices in to Share Market. With a minimum SIP Investment of Rs. 1,000 a month, you get a chance to invest in a variety of scrips, which varies from 25-40 scrips in just one fund.
A brief comparison with other tax saving options
| Parameter | ELSS | PPF | FD | NSC | EPF |
| Lock-in Period | 3 years | 15 years | 5 years | 5-10 years | Retirement or Resignation |
| Limit | No limit | 500 – 1,50,000 | No limit | 500 – No limit | 12% of Basic |
| Return on Investment | Market linked | 7.80% to 8% | Depends on Bank | Linked to Government Bonds | 8.55% |
| How to invest? | Cheque, DD, Online – Lumpsum & SIP | Cheque, DD, Online – Lumpsum & in installments | Cheque, DD, Online – Lumpsum & in installments | Cheque, DD, Online – Lumpsum & SIP | Deducted and Deposited by the Employer |
| Income Tax on Returns | Relatively Tax-Free | Not Taxable | Taxable | Taxable | Tax-free |
| Premature Withdrawals | Not Possible | Starting from 7th Year | Possible | Not Possible | In some cases |
| Rs. 5,000 a month investment for 5 years will yield – | Rs. 4.35 lakh | Rs. 3.67 lakh | Rs. 3.60 lakh | Rs. 3.61 lakh | Rs. 3.72 lakh |
It is often said that investment in equities comes with risks. It should be avoided by conservative investors and people who are planning for retirement at a very late stage in their lives. In reality, it is far from the truth. Investing in equities for the short term makes it risky. If done for the long term then it helps diverse the risk and hence, the risk becomes manageable. Investment in ELSS done for tax saving purposes should ideally be done through SIP that allows an investor to pay a stipulated amount throughout the year. Investment through SIP also reduces the risk as it benefits from rupee cost averaging. Rupee cost averaging helps to stabilize investment, especially equity investments, where the risk involved is higher.
Conclusion
For ELSS, the phrase “kill two birds with one stone” stands perfect. If an investor is looking for good returns and saves tax, then ELSS is the scheme for you. So start investing in tax savings schemes especially through the ELSS route from the beginning of the financial year. Let the saving and investing begin!
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