You are torn between the smartphone you have had your eye on and the newly launched high-fidelity headphones that you have just begun to covet. But as you are about reach a decision, your HR manager pops the question: Tax planning kiya kya?
It’s the start of the financial year, and you have just a few days to make your tax-saving investment declarations or face tax cuts in your salary.
So, what are your options?
Most experts agree that among the several tax-saving options, equity linked savings schemes (ELSS) offer an excellent combination of shorter lock-ins, market-linked returns and greater flexibility, making it one of the top choices for investors.
An ELSS fund can help you save as much as Rs. 46,800* in taxes per annum if you are in the 30% Income Tax bracket and invest Rs. 1.5 lakh per annum qualify.
Do we hear you say: Tell me more?
So, what’s an ELSS?
An ELSS is like any other mutual fund scheme that invests primarily in the stock market. The only difference is that an ELSS comes with a three-year lock-in, which means you cannot sell your investment before three years from the date of purchase. In case of an ELSS SIP, each instalment is locked in for a period of 3 years. Which also means each instalment will have a different maturity date.
How does it help you save tax?
Investments in ELSS up to a maximum of Rs. 1.5 lakh per annum qualify for income deductions under section 80C of the Income Tax act. What this means is that you can deduct the amount you invest in an ELSS from your total income to reduce your taxable income and, therefore, your taxes.
Let’s take an example to better illustrate this. Mahesh is senior software engineer with a taxable income of Rs. 12 lakh a year. This puts him in the 30% tax bracket. He decides to invest Rs. 1.5 lakh in an ELSS fund. Under 80C of the income tax act, this brings down his taxable income to Rs. 10.5 lakh and translates into a saving of Rs. 46,800* (31.2%% of Rs. 1.5 lakh)*.
That’s more than enough for both your smartphone and hi-fi speakers.
*We have considered the current 4% educational cess on tax. Including cess, the tax saving per annum would amount to 31.2% of Rs. 1.5 Lakh or Rs. 46,800.
Why should you consider ELSS?
Investments in other tax saving instruments under 80C, be it in tax-saving fixed deposits (FDs) or employee provident fund (EPF), or public provident fund (PPF) or national savings certificates (NSC) or ELSS, qualify for the same income deductions. But ELSS holds an edge on many counts.
Shortest lock-in: ELSS has the shortest lock-in of all 80C investments – of just three years. Tax-saving FDs have a five-year lock-in and PPF has a 15-year maturity. Thus, ELSS allows you greater flexibility in the medium term.
Potentially higher returns: Most of the 80C investments offer returns in single digits on an average – anywhere between 6 to 8%*. ELSS has the potential to offer significantly higher returns – since it invests in a portfolio of equity instruments.
Better post-tax returns: Except PPF and NPS, ELSS offers better post-tax returns than other 80C investments because long term capital gains of up to Rs. 1 lakh a year from ELSS mutual funds are exempt from income tax and long-term capital gains above Rs. 1 lakh are taxed at 10%.
Ease of investment: Investing in an ELSS is simple (read step-by-step instructions on how to invest in any mutual fund). You can put your money via a systematic investment plan (SIP) or as a lumpsum. You can continue holding your ELSS units after the 3-year lock-in. But if you choose to sell them, you can do it online, in just a few clicks. The funds are credited into your account with 3-4 working days.
To avail the tax benefits, you will receive your investment statements from the Mutual Fund company directly on your registered email ID with DBS Bank.
How does ELSS compare with other 80c investments?
|Name of Instrument||Lock-In period||Indicative Returns*||Tax on Returns|
|ELSS||3 years||12-14%||Taxed at 10% on long term capital gains above Rs. 1 lakh|
|Tax-saving FD||5 years||6-7%||Yes|
|National Saving Certificate (NSC)||5 years||7-8%||Yes|
|Public Provident Fund (PPF)||15 years (premature withdrawals allowed from 7th year)||7-8%||Returns are exempt from tax|
|National Pension System (NPS)||After the age of 60||8-10%||Partially Taxable|
*All returns are indicative in nature. Actual returns will vary based on the instrument & market conditions
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