How ELSS is comparable to other tax saving options

ELSS or equity linked savings schemes are open ended diversified equity mutual funds which have a lock in period of 3 years as they offer tax benefits to investors under Section 80C of the Income Tax Act 1961.

Also known as ELSS funds, one can invest in ELSS through SIP (Systematic Investment Plan) or through lumpsum (One time investment). It must be noted that taxes can be saved either through risk free or market linked schemes. The former consists of PPF, national savings certificates (NSC), traditional insurance policies and more. The latter, on the other hand would consist of ELSS and ULIPs (unit linked insurance plans). In the risk free schemes, capital safety is assured whereas the ones with risk are subject to market risks. Investors that want total safety of the money invested should only opt for government savings schemes, FDs or other risk free options.

On the contrary, if one is willing to take a certain amount of risk and remain invested in ELSS even beyond the lock in period, ELSS funds could be your best choice for tax savings.

TAX TREATMENT

Tax Treatment takes place at three stages of investment:

At the time of investment

During the investment period 

At the time of maturity

Let us explain the tax treatment for the various 80C Investment schemes:

ELSS - During the first stage, there is tax saving under section 80C and during the second stage the dividend is added to your income and at third stage, it is tax exempt from capital gains upto Rs 1 Lakh in a financial year and thereafter, taxed at 10%.

PPF- During the first stage, there is tax saving under section 80C and during the second as well as third stages, it is tax exempt.

NSC (VIII & IX issue) - During the first stage, there is tax saving under 80C. During the tenure of investment, interest is taxable. However, the accrued interest, except in the final year, qualifies for deduction under 80C, provided it is within the overall limit of RS. 1.5 Lakhs. On maturity of the investment, if accrued interest during the tenure is not declared as income in IT Returns, the accrued interest in the entire period is taxable, otherwise only the final year accrued interest would be taxable.

Tax Saving 5 year Bank FD - During the first stage, there is tax saving under section 80C. During the tenure of investment, it is taxable. Bank deducts the tax at source. On maturity too, it is taxable.

You can observe that ELSS funds, PPF and life insurance plans are the most tax friendly investment options under Section 80C, according to the above information provided.  However, as discussed earlier , ELSS tax saving mutual funds scores above PPF and life insurance plans in terms of the returns generated and hence, they are a better choice.

ELSS and SIP Mutual Fund

One can invest in ELSS through SIP mutual fund also. An investor can choose to invest a certain amount every month/quarter/daily in a chosen ELSS fund. This gives them convenience and flexibility while helping to grow their wealth and save taxes at the same time. If you are investing through SIP mutual fund, a point to be noted is that there will be a 3 year lock in period for your investment for each SIP instalment.

Conclusion

In this article, we discussed at length, about ELSS Funds, its taxation connotations and how to invest in them through SIP mutual fund.

Comments

Post a Comment

Popular posts from this blog

Use Retirement planning calculator to ensure financial independence

Retirement Planning is one of the most important life-stage goals. Unfortunately, retirement planning does not get the importance it deserves. As a result many investors approach retirement with some trepidation about maintaining financial independence and their lifestyles after retirement. You should start planning retirement from the early stages of your working career to ensure financial security after retirement. In this article we will discuss why you should use a retirement planning calculator or pension plan calculator to plan savings and invests for your retirement goal. What is retirement planning? After retirement you will not get regular salaries and will have to depend on the income from your investments to meet your expenses. The goal of retirement planning is to maintain financial independence by accumulating a sufficiently large retirement corpus to meet all your needs. Why is retirement planning important? In India, the traditional family construct is joint fami...
Read more

How Mutual fund lump sum calculator is helpful

Lump sum investment, also referred to as one time investment, is investing your entire amount in one go. It is the simplest form of investments. Though Systematic Investment Plans (SIPs) have gained a lot of popularity in India, lump sum investments remain one of the most popular forms of investments. In this article, we will discuss about mutual fund lump sum investments and how to calculate its returns using the lumpsum calculator . When do you invest in lump sum? There are many instances when you prefer to invest in lump sum:- The most important requirement for investing in lump sum is availability of sufficient investible funds. If you have an investible corpus, you may prefer to invest in lump sum Salaried investors usually get their annual bonus once in a year. Since it is a relatively large sum, you may want to invest a portion of it or all of it, in lump sum. From time to time, you may receive windfall cash-flows e.g. maturity proceed of fixed deposits, recurring depo...
Read more

Mutual fund schemes and things to avoid in investment

Mutual fund is a way of investing one’s savings into funds that goes into various assets and categories, depending on the choice made by the investor. It is an investment vehicle, which is professionally managed and offer risk diversification. Mutual Fund schemes are a good investment option for the common man as they are accessible, affordable and can be started with a small amount.   There are various types of mutual fund schemes available - Equity Funds, debt funds and hybrid funds. The confusion in choice, generally lies in the type of equity or debt fund to be selected, the time period of investment and the goal which one is working towards. All these questions are rather pieces of the same puzzle which need to be selected carefully, after research, in order to give you the perfect picture. The major reason why people invest in mutual funds is to create wealth. However, investor should avoid some common investing mistakes as given below - Ignoring one’s risk profile - On...
Read more