By Joydeep Sen
There are a number of funding choices for saving tax beneath Section 80C of the Income Tax Act. Quite logically, these include a lock-in interval. It can’t be allowed that for the sake of saving tax you do the funding at present and exit after a brief time period. We will focus on one of many many Section 80C choices that’s comparatively extra versatile by way of time — Equity Linked Savings Scheme (ELSS).
These are fairness funds and for the portfolio of those funds, there isn’t a restriction on the fund supervisor, i.e., massive cap / small cap, and many others. For you, the investor, there’s a lock-in interval of three years. This lock-in interval of three years is comparatively decrease than the opposite choices beneath Section 80C. However, we’re not recommending solely to benefit from this time interval of three years. Equity is a long-term funding, say, 10 or 15 years. The elements about ELSS that we need to spotlight are:
Flexibility
As we simply talked about, you needn’t withdraw simply after completion of three years of funding. Your cash turns into free after three years of funding. You could withdraw as and if you require money flows. It may very well be after, say, three years or 5 years or seven years. The longer your cash stays invested, the longer it’s rising together with the fairness market.
Circulation
It could so occur that you don’t require money instantly after three years of funding, however you might not have as a lot surplus in that yr for Section 80C tax-saving investments. In that case, you might withdraw as much as Rs 1.5 lakh (relying in your funding shortfall) out of your ELSS fund and make investments once more. The long-term nature of fairness investments stays intact, as you’ve got successfully continued for a horizon past three years.
Tax effectivity
When you might be withdrawing an quantity out of your ELSS fund after, say, three years of funding, there’s extra to it than simply withdrawal of the quantity. Let us say, the fairness market grows by roughly 10% per yr. You make investments Rs 1.5 lakh in an ELSS fund, and after three years, it turns into Rs 2 lakh. When you might be withdrawing, say, Rs 1.5 lakh for that yr’s tax-saving funding, you might be nonetheless leaving Rs 50,000 within the fund.
Not solely that, the Rs 1.5 lakh you withdraw, features a principal element and a returns element. As lengthy because the returns element is inside Rs 1 lakh, that half is tax-free. As per tax legal guidelines, long run capital positive factors from fairness shares and fairness mutual funds, as much as Rs 1 lakh per monetary yr, is tax-free. To be famous, your funding in ELSS fund is eligible for tax profit beneath Section 80C, however the returns will not be tax-free per se. As an instance, dividends from ELSS funds are taxable in your palms as per your slab charges. Long-term capital positive factors from ELSS funds turn out to be tax free, offered you don’t have a lot of different capital positive factors booked in that yr, i.e., it’s inside Rs 1 lakh.
Long-term returns
In the mounted earnings choices accessible beneath Section 80C, you’ve got higher visibility in your returns. In fairness, over an extended horizon of 10 or 15 years, returns are normally higher than mounted earnings. Hence ELSS funds could be just right for you from that perspective as nicely. At the price of repetition, to earn sanguine returns from ELSS funds, you shouldn’t have a perspective of three years solely, however longer.
It is advisable to start out your tax-saving investments firstly of the monetary yr, to be able to area it out, and never depart it for subsequent March. The idea of SIP works on value averaging over sustained purchases over a time period.
The author is a company coach and an writer.
Source: www.financialexpress.com”