Posted On Friday, Feb 15, 2013
As 31st March nears, frequent mails from your accounts department must be striking your inbox to remind you to submit your investment proof or for some of you either your CAs must be persuading you or you might have to take care of your tax submissions all by yourself. It is that time of the year, when the fright of tax deduction grips us and we are in a search of an ideal investment option where we can park our hard earned money.
Tax saving mutual funds, also known as Equity Linked Savings Scheme (ELSS) offers the investor twin benefits of tax savings and the potential for wealth creation by investing in equities for the long term. The tax benefit from an ELSS is an immediate saving on the investments made, compared to just potential returns offered by other equity-oriented schemes.
ELSS = Tax Benefits + Long Term Capital Appreciation
What are the other benefits of investing in ELSS?
Your taxable income is reduced by the amount of investment made subject to a maximum investment of Rs. 100,000, i.e. lower tax outgo
Dividends declared by the scheme are tax-free.
An ELSS scheme has a three-year lock-in period, which allows the fund manager remain fully invested in equities, and maintain lower cash levels as there are no redemption pressures during this period.
All capital gains will be long term and therefore tax-free.
Through the years you've been saving taxes with Public Provident Funds (PPFs), National Savings Certificates (NSCs) and Bank Fixed Deposits (FDs). Sure, these are good and "safe" options but have you ever considered earning extra returns along with saving taxes?
Let us compare it with other tax saving investment options available under Section 80C to understand the risks and returns characteristics of ELSS funds.
ELSS vs. Other Investment Options u/s 80 C
Lock-in period (years)
15 (can withdraw 50% after 7 years)
Returns per annum
8.5% (depends on prevaling interest rate)
Interest Tax Free
No tax on Dividend & capital gains
SIP available or Lumpsum of Rs. 500
* There is no upper limit on investments. However, only investments upto Rs.100,000 per year are can be claimed as deductions under Section 80C. Source : Nsiindia.gov.in, Sbi.co.in
Note: The instruments illustrated above are different in nature having different risk factors and the comparison is given for the purpose of general understanding only.
ELSS gives you the opportunity to invest in equities
ELSS funds invest largely in equity and equity related securities (usually 80-100%). Historical analysis shows that equities have the potential to earn higher returns (higher risk) as compared to other asset classes over a longer period of time.
Lowest Lock-in period
While the maturity period of other tax saving instruments vary between 6 to 15 years, ELSS has the shortest lock-in period 3 years under the Section 80C category. While this period too can seem lengthy, it is a blessing in disguise since ELSS funds usually give healthy returns after the lock-in period.
The Systematic Investment Plan (SIP) option is probably the best feature while investing in ELSS since you can invest a small amount (as low as Rs. 500) every month for a specific period. With an SIP, you tend to reduce risks, receive the benefits of rupee cost averaging and adopt a disciplined approach to investing.
No tax on capital gains and dividends
When you sell your ELSS units, the profits (long-term capital gains after the 3-year lock-in period) are not taxed.
Investment in an ELSS should not be looked only from the purpose of saving tax. You should also consider it as an investment option to build your corpus for the future. With ELSS you achieve both the twin objectives - effective tax saving and capital growth in the long run.
And if you are looking for an ELSS fund to save tax this season, maybe you should consider adding the Quantum Tax Saving Fund (QTSF) - An open ended Equity Linked Savings Scheme with 3 years lock in period to your portfolio. With all the features and advantages of an ELSS fund, it's time you experienced the benefits of safe guarding your money with sensible risk-adjusted returns through QTSF - in addition to your PPFs, NSCs and FDs.
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