The tax-saving season is going to end on 31 March. A lot of tax-saving products are available, choosing the right product is not very easy. Equity Linked Savings Scheme (ELSS) is a kind of mutual fund scheme, popularly known as tax saving mutual funds, that provides tax exemption under section 80C of Income Tax Act 1961. ELSS scores above other tax-savings schemes. Also, please read our other article, "Comparison between Equity Linked Saving Schemes (ELSS) and Public Provident Fund (PPF).”
Tax Savings:
Many products qualify for 'tax-deduction under section 80C, which are listed below:
Equity Linked Saving Schemes (ELSS)
Employees’ Provident Fund (EPF)
Fixed Deposits (5-year period)
Housing Loan (Principal) Repayments
Kian Vikas Patra (KVP)
Life Insurance Premium
National Pension Scheme
National Saving Certificates (NSC)
Pension Funds
Public Provident Fund (PPF)
School/college fee
One has to understand different available options before committing to any particular option. It is advisable to make the best use of this section to save tax and get better returns, and, in turn, achieve financial freedom. However, most people look at them with mere "tax-saving" than an investment perspective.
Equity Linked Savings Scheme (ELSS):
An ELSS is an equity-based mutual fund scheme. It invests in equity-related securities similar to a diversified equity mutual fund except that they have a 3-Year lock-in- period and are eligible for tax-deduction under 80C up to Rs.1,50,000/- (FY 2020-21).
ELSS scores over other tax saving investments due to the below reasons:
Lesser lock-in period: The lock-in period of ELSS investment is 3 years only which is the least among all other investment products under 80C. After this, one can withdraw the entire Investment or continue to hold for long-term wealth creation.
Higher return potential: Returns market dependent and are not fixed, but historically they have given higher returns in the long-term than any other asset class.
Other tax advantages: ELSS enjoys other tax advantages applicable to mutual funds. There is no tax on the dividends declared, and effective 1 April 2018, the long-term capital gains exceeding Rs 1 lakh a year is taxable at the rate of 10%.
Choice of ELSS: Many AMCs offer the ELSS schemes. One can select different options within the scheme viz; growth, dividend payout, or dividend reinvestment.
Convenient and flexible: ELSS is much convenient and flexible for investing, can be bought by lump-sum, SIP, or Switch, or STP from an existing mutual fund scheme. One can directly buy it online.
A brief comparison of some of the major tax-saving products is given below:
| S No | Particulars | PPF | NSC | Bank Deposits | ULIPs | ELSS |
|---|---|---|---|---|---|---|
| 1 | Lock-in Period Years | 15 | 5 | 5 | 5 | 3 |
| 2 | Minimum Investment (Rs) | 500 | 100 | 100 | Depends on insurer | 500 |
| 3 | Maximum Investment limit (Rs) | 1,50,000 | No Limit | No Limit | No Limit | No Limit |
| 4 | Maximum Investment for 80C benefit (Rs) | 1,50,000 | 1,50,000 | 1,50,000 | 1,50,000 | 1,50,000 |
| 5 | Rate of Return (%) | 7.1 | 6.8 | 5.1 to 6.75 based on Bank | Market-driven | Market-driven |
| 6 | Taxation on maturity Income | Tax-Free | Taxable | Taxable | Exempt for annual premium up to 2.5 lakh | LTCG tax of 10% for gains above Rs 1 lakh |
Long Term Capital Gains (LTCG)
ELSS, thus, scores better over other tax-saving products. However, one should understand that the returns are not guaranteed but based on the market performance.
Case for Equity Investing through Mutual Funds:
Most products under 80C are debt-based, that offer assured rates of return. However, when we adjust these returns for taxation and inflation, it will yield negative returns will be eroding your wealth. We should always aim for positive real (higher than inflation) post-tax returns. Then only wecan create wealth for a better future.
Equity is the asset class that beats inflation in the long-term. But equity returns are not guaranteed, dependent on market fluctuations, hence riskier for the short-term. By choosing equity mutual funds than direct equities, one can get the benefits of diversification and professional investment management with lesser costs. One can invest by Systematic Investment Plan (SIP) of ELSS to reduce the risk further, invest small amounts conveniently, generate inflation-beating returns in the long run. Also, please read our article "Mutual Fund SIPs for Wealth Creation.”
Due to the above advantages, ELSS will score over other products under Section 80C. But the final decision to choose a product depends on the risk appetite and expected returns of the investor.
By Team Wealth ATM
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Mutual fund investments are subjected to market risks. Please read the scheme-related documents carefully.