Monday, 19 April 2021

Tax saving gets a lot easier with this plan

 

Tax saving gets a lot easier with this plan

The growing popularity of equity linked saving scheme in India or ELSS, as the acronym goes, indicates its considerable benefits for regular investors. ELSS is a great choice for investments since it gives rather generous tax benefits. ELSS tax saving funds are funds linked to equities in the market which deploy a major portion of the fund corpus towards buying equities or equity-linked instruments. They are known as tax saving ELSS mutual funds since they offer tax exemptions from your annual taxable income based upon deductions under Section 80C of the Income Tax Act.

Keeping ELSS in portfolio will be a wise move since these funds deploy investments throughout multiple geographies and cover several companies varying form small cap entities to mid cap and even large cap entities. This enables diversification of your portfolio over a period of time. The schemes come with a mandatory 3-year lock-in period and you can only redeem your units post the expiration of this duration. The funds have risks since they are exposed towards equity markets and their innate volatilities although they have the possibility of garnering superior returns over the long haul. You can lower risks of volatility in the market by deploying SIPs (systematic investment plans) for investing in ELSS schemes. You can always invest a lump sum amount in ELSS schemes but this will be riskier. Most investors prefer investing smaller amounts every month or periodically by way of SIPs while it gets them good tax benefits in turn.

Ensure that your ELSS plan is diversified throughout various business sectors and market capitalization levels. There are two types of funds, namely Growth Funds where long-term creation of wealth is the objective and investors realize the full value at the time when they redeem their units and there is also the Dividend Payout option where you either get dividends which are tax-free or reinvest dividends wholly as new investments.

An equity linked saving scheme in India is a better option since you get deductions up to Rs. 1.5 lakh upon investments in the same under Section 80C. In spite of the new tax rules, i.e. taxes upon LTCG (long-term capital gains) from ELSS options, the funds are one of the best options for saving on taxes. They have the potential of superior long-term returns while covering your entire spectrum of Section 80C deductions simultaneously. They offer the highest returns after taxes as compared to all other Section 80C choices including ULIPs and PPF (Public Provident Funds). Historically, these plans have ensured close to 12% over the last decade and even higher.

The lock-in period is also low compared to EPF, PPF and NSC which have minimum 5-15 years as their lock-in periods. You can also easily shift to another fund if you are dissatisfied with the performance of your current ELSS fund. Long-term capital gains are also exempted till Rs. 1 lakh and the dividends that you get will be tax-free in your hands. You can keep investing after the expiration of the three-year lock-in period. It is thus important to bust wrongful ELSS myths about saving taxes and start off with a plan that is more suited towards your specific needs and requirements.

 

 


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