ELSS: Equity Linked Savings Scheme (ELSS) is better when it comes to market-linked options.
Taxpayers always take measures to save their tax, under the provisions found under section 80C of Income Tax. There are several investment options to save tax under this section. But it is not easy for taxpayers to choose one of these best ways. Of these investment options, some of them give fixed returns. While some offer market-related returns.
Maximum savings of Rs 46,800
Under Section 80C of Income Tax, a person can get a real tax saving benefit of Rs 46,800 per annum with the existing tax rules (with 4% education cess) by investing a maximum of Rs 1.5 lakh in a financial year. Here, the tax savings of Rs 46,800 mentioned above have been calculated at the highest tax bracket ie 30%.
ELSS good choice
Talking about market-linked options, Equity Linked Savings Scheme (ELSS) is better. ELSS is an equity mutual fund category, in which tax is exempt under Section 80C of Income Tax on investment. As per the current tax rules, the eligible investor (person / HUF) can invest up to Rs 1,50,000 in equity-linked savings scheme (ELSS) under Section 80C of the Income Tax Act, 1961 (along with other fixed investments) to his gross total income. Are entitled to deduct from.
About the tax on investment
By adding the existing 4 percent education cess on tax, saving tax on Rs 1.5 lakh every year would be 31.2 percent or Rs 46,800. Long-term capital gains and dividend distribution tax will also have to be paid on this. The tax benefit depends on the provisions of the Income Tax Act 1961 and the amendments that occur from time to time. However, it is important to note here that saving tax through investment in ELSS is possible only when the taxpayer opts for the existing system of tax rate. In the new tax rate regime, the taxpayer does not get the benefit of any deduction.
Why Investing in ELSS is Best?
- Talking about investing in ELSS, at least 80 percent of this exposure should be in equity. It can technically be up to 100 percent. ELSS also has the flexibility to invest in all market caps. Which makes it a unique product among equity funds.
- In addition, ELSS has the lowest 3-year lock-in period for investment, while in contrast, 5-year lock-in period is common in other tax-saving instruments. The 3-year lock-in means that you cannot sell the units purchased before the completion of 3 years from the date of purchase.
- Investments in mutual funds have been facilitated through the Systematic Investment Plan (SIP). Talking about 1.5 lakhs for tax savings, it can be invested year round with Rs 12,500 per month. However, the lock-in period varies for each SIP installment, which means that each monthly SIP remains locked for a period of 3 years.
- Another reason for choosing ELSS as an option to save tax is that they give high returns. Investing in equity effectively provides better returns that are higher than the regular inflation rate. On the contrary, most tax-saving options with fixed returns such as PPF, 5-year FD, NSC, etc. are hardly able to give higher returns than inflation. Not only this, in the last decade, the fixed returns from such tax-saving products have decreased, which is also reducing their attraction.
- The return on investment in ELSS and the amount received from redemption are also completely tax-free. ELSS offers better post-tax returns, as long-term capital gains (LTCG) up to Rs 1 lakh a year from ELSS mutual funds are exempt from income tax. Taxes are payable at the rate of 10 per cent on the profit beyond this limit. The partial or full tax has to be paid on the benefit from tax saving options other than PPF.
- ELSS’s wealth raising feature coupled with tax saving makes it a suitable and better first equity investment option for all investors. For the first time, investors benefit from mandatory lock-in and get an incentive from tax savings.
Summary: Experienced investors can benefit from the inclusion of ELSS in their investment portfolio to achieve their financial goals. Overall, taxpayers can take advantage of various features of ELSS to reduce their income tax liability, gain experience of mutual fund investment and wealth creation.
(Author: Ajit Menon, CEO, PGIM India Mutual Fund)
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