By investing in Equity Linked Savings Schemes (ELSS) Investors can get tax deduction of up to Rs 150,000 from their taxable income under Section 80C of Income Tax Act 1961. Equity Linked Savings Schemes (ELSS) is an equity scheme and also known as Tax Saver Mutual Funds.
How Does ELSS Scheme Work
ELSS schemes invest in a diversified portfolio of stocks with the objective of generating capital appreciation for investors over a sufficiently long investment horizon. Though ELSS investments are subject to market risks, they are among the best tax saving investments under Section 80C because historical data shows that equity has been the best performing asset class in the long term.
Example: Rs 1.00 Lakh invested in Reliance Tax Saver Fund Growth Plan Growth option on April 01, 2007 has grown to Rs 4.41 Lakhs compared to Rs 2.33 Lakhs in PPF (Public Provident Fund). Reliance Tax Saver Fund has given 15.78% annualized return during the period (based on NAV as on 12/5/2017)
ELSS funds have a lock-in period of three years; investors cannot redeem ELSS units till three years from the date of investment. Investors can invest in ELSS in lump sum or through Systematic Investment Plans (SIP). By investing through SIP mode in ELSS funds, investors can take advantage of volatility in stock markets through rupee cost averaging. However, when investing in ELSS through SIPs, investors should note that, each SIP instalment is locked in for three years.
In the last 10 years a monthly SIP of Rs 5,000 in Reliance Tax Saver Fund Growth Plan Growth option would have grown to Rs 15.58 Lakhs against an investment of Rs 6.00 Lakhs (based on NAV as on 12/5/2017). The SIP return has been XIRR @ 18.16%
ELSS Scheme Investment Options
While investing in ELSS Schemes, investors can choose between Growth and Dividend Options based on the investment objectives. While the profits are reinvested in the scheme and compound over the investment period in Growth Option, in Dividend Option the profits made by the scheme are distributed to investors in the form of dividend payouts. Unlike other mutual fund schemes, dividend re-investment option is not available in ELSS.
One can save up to maximum Rs 46,350 in taxes every year by saving the maximum amount of Rs 150,000 in ELSS schemes under Section 80C of The Income Tax Act 1961.
Apart from tax savings, one can use the ELSS investments made every year for reaching their long term financial goals, like retirement planning, children’s education, wealth creation etc. Though ELSS investments have a lock-in period of 3 years, compared to other Section 80C investment options, ELSS offers the maximum liquidity to investors compared to PPF and Bank Tax Saving FDs which are locked-in for 15 years and 5 years respectively.
ELSS is also the most tax friendly investment among the eligible Section 80C investment options. Since ELSS are equity oriented schemes with a minimum investment period of three years, long term capital gains are tax free. Dividends paid by ELSS schemes are also tax free.
