What are the characteristics of a sound investment? Usually, a good investment gives profits, has the potential to tackle inflation, can explore the true power of compounding interest and diversifies your invested money. An equity mutual fund is one such investment that can display all these traits. What if, along with being a sound investment, equity mutual funds could also help you save taxes? Now, that would be an icing on the cake! However, you don’t have to look around hard. Equity-Linked Savings Scheme [ELSS], a type of equity fund, can provide the icing.
So, let’s run the rule over ELSS and see how it fares against other tax-saving products.
Tax Benefits
An ELSS is a diversified equity mutual fund with a majority of its investments in equities. Thus, like an equity mutual fund, there is no Long-Term Capital Gains [LTCG] tax for an ELSS.
ELSS funds have a lock-in period of three years. The amount you receive after three years is tax-free. ELSS helps you claim tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961. Notably, this proviso is not applicable to other types of equity funds.
Why ELSS trumps other investments?
National Savings Certificate [NSC] and public provident fund [PPF] can be considered ELSS’ direct rivals when it comes to tax-saving options. Let’s see how ELSS fares against these two tax-saving funds.
Lock-in period
o ELSS: 3 years
o PPF: 15 years (option of partial withdrawal after 6 years)
o NSC: 5 years
Returns
o ELSS: 16.48%*
o PPF: 8%
o NSC: 8%
Safety
o ELSS: Related to equity performance
o PPF: Considered safe; different asset class
o NSC: Considered safe; different asset class
Deposit method
o ELSS: Systematic investment plan
o PPF: Available [deposits can be made in 12 instalments]
o NSC: One-time deposit
Tax on returns
o ELSS: Returns and dividends are tax-free, but only after the first year
o PPF: Returns are tax free.
o NSC: Not available
* Category average as on September 29, 2017 as per the CRISIL–AMFI ELSS performance index.
The lowdown on the three tax-saving funds show that ELSS can provide the highest returns. It also scores favourably on its liquidity quotient when compared to the other two options.
Additionally, by investing in ELSS through the Systematic Investment Plan [SIP] route, you get a chance to explore the power of rupee cost averaging.
ELSS: Your doorway to equity
In a country of over 132 crore people, a little above 5.5 crore people invest in mutual funds. According to another report, most states have less than 5% registered stock market investors. Thus, it is safe to assume that Indians don’t like to invest in equities. But, ELSS could help change your views. With ELSS, you can save taxes and simultaneously enter the world of equity.
Unit Linked Insurance Plan [ULIP] may shout out saying they provide the option of investment and insurance and is therefore better than ELSS. But ELSS is more liquid, tackles inflation better and can also provide higher returns. To top it, ELSS is managed by a professional fund manager; you don’t need to constantly worry about revisiting your portfolio.
To sum up
There are numerous options available for you to save taxes. However, very few options can help you save taxes and give high returns. ELSS can be that option. So why wait?