Tax planning may seem like a tedious exercise requiring lot of efforts that may make an ordinary investor nervous at the first glance. Equity Linked Savings Scheme (ELSS) offers a simple way to get tax benefits and at the same time get an opportunity to gain from the potential of Indian equity markets.
What is ELSS?
Simply put, ELSS is a type of diversified equity mutual fund which is qualified for tax exemption under section 80C of the Income Tax Act, and offers the twin-advantage of capital appreciation and tax benefits. It comes with a lock-in period of three years.
Why should one invest in an ELSS?
ELSS funds are one of the best avenues to save tax under Section 80C. This is because along with the tax deduction, the investor also gets the potential upside of investing in the equity markets. Also, no tax is levied on the long-term capital gains from these funds. Moreover, compared to other tax saving options, ELSS has the shortest lock-in period of three years.
BEYOND TAX SAVING
|Parameter ||PPF ||NSC ||ELSS |
|Tenure ||15 years ||6 years ||3 years |
|Returns ||(Compounded Annually) |
8.80 % ^
8.60 to 8.90 % ^
|Not assured dividends/ returns |
|Minimum investments ||Rs.500 ||Rs.100 ||Rs.500 |
|Maximum investments ||Rs.1,50,000 ||No limit* ||No limit* |
|Amount eligible for |
deduction under Section 80C
|Rs.1,50,000 ||Rs 1,50,000 ||Rs 1,50,000 |
|Taxation for interest || Tax free || Taxable ||Dividends and capital gain tax free |
| Safety/ Rating || Highest || Highest || High Risk |
* There is no upper limit on investments. However, investments of only upto Rs.100,000 per year are allowed to be claimed as deductions under Section 80C of IT Act.
^Source: http://finmin.nic.in, Rates incorporates compounding wherever applicable.
Disclaimer: The comparison of ELSS Vs other tax savings instrument has been given for the purpose of the general information only. Investment in ELSS carry high risk and any investment decision needs to be taken only after consulting the Tax Consultant or Financial Advisor. SBI Mutual Fund will not accept any liability/ responsibility/loss incurred on any investment decision taken on the basis of this information.
|Instrument ||Lock-in Period |
|ELSS ||3 Years from the date of allotment of the respective Units |
|Bank Fixed Deposit ||5 Years |
|PO Time Deposit ||5 Years |
|NSC ||6 years |
|PPF ||15 Years (Partial withdrawal after 6 years) |
Source: Banks and Post Office
Pros and Cons
Like all investment options; ELSS too come with its share of advantages and disadvantages.
Advantages of ELSS over NSC and PPF
- Main advantage of ELSS is its short lock-in period. Maturity period of NSC is 6 years and PPF is 15 years.
- Since it is an equity linked scheme earning potential is high.
- Investor can opt for dividend option and get some gains during the lock-in period
- Investor can opt for Systematic Investment Plan
Disadvantages of ELSS
- Risk factor is very high compared to NSC and PPF
|Particulars ||Without ELSS/ 80C Tax Saving Investment ||With ELSS / 80C Tax Saving |
|Gross Total Income ||Rs.7,50,000 ||Rs.7,50,000 |
|Exemption Under Section 80C ||Nil ||Rs.1,00,000 |
|Total Income ||Rs.7,50,000 ||Rs.6,50,000 |
|Tax on Total Income ||Rs.80,000 ||Rs.60,000 |
|Tax saved on Investment ||Nil ||Rs.20,000 |
Illustration of Tax exemption for a male person less than 60 years in receipt of salary income for the assessment year 2013-14 (FY 2012-2013)
It is suitable for all types of investors who are not risk averse and need to invest in tax planning instruments. Though there is no age to get started on an ELSS, it is good investment to have for those who are just starting their careers as it can help them shed their inhibition about investing in equities through mutual funds in a big way.
How to start an ELSS account?
There are two ways to invest in ELSS.
- Invest a fixed amount every month through systematic investment plan (SIP) in ELSS and reduce the burden of large investment towards the end of financial year.
- Invest lump sum at any point of time.
Why SIP route for ELSS?
One of the best ways to invest is to save and invest on a regular basis through SIPs. SIP is a planned investment programme, whereby an investor invests small amounts of his/her savings in mutual funds at regular intervals.
Moreover, SIP helps an investor take advantage of the fluctuations in the stock markets by rupee cost averaging (in a rising equity market an investor gets fewer MF units but when the market is sliding he/she gets more MF units) and also helps him/ her reap the benefits of compounding. A SIP in ELSS offers an investor the best combination of investments—tax-savings and capital appreciation available to investors. The minimum investment in an ELSS through the SIP route can be as small as Rs 500.
Picking Magnum Taxgain
While choosing an ELSS an investor would do well to keep in mind the size, experience, quality and consistency of fund houses over a period of time. Launched in March 1993, SBI Magnum Tax Gain Scheme is 19 years old. The scheme has average asset under management of Rs. 4518 crore (for the quarter Apr-June 2012).
So, what’s still holding from making your choice? Click here to get started with your tax planning investment for this year and earn yourself some peace of mind.
: Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Asset Management Company
: SBI Funds Management Private Limited (A joint venture between SBI and AMUNDI) -191, Maker Tower 'E', 19th Floor, Cuffe Parade, Mumbai 400 005. Trustee Company
: SBI Mutual Fund Trustee Company Pvt. Ltd. Please read the Scheme Information Document carefully before investing
Prospective investors are requested to read the scheme information document before making any decision of investment. Investors are also strictly advised to consult their legal, tax and financial consultants before making any decision of investment. The AMC takes no responsibility of updating any details/ information in the material. The AMC/ Mutual Fund shall not be responsible for any loss, damage or any nature arising from the use of this material.
This information is given for general purposes only. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All recipients / readers of this material should before dealing and or taking any decision of investment are advised to carefully review the Scheme Information Document and consult their legal, tax and financial advisors before making an investment decision. All opinions and estimates included here constitute our view as of this date and are subject to change without notice.