How to save tax with ELSS mutual funds?

Mutual Funds | admin | March 18, 2011 at 11:39 am

Year after Year, it has become a trend for people to rush to invest in tax saving instruments in the end of every financial year and in the process end up investing in such instruments which does not help them in creation of wealth in long term.

There are many tax-saving instruments, like NSC, PPF and Equity Linked Savings Scheme (ELSS). The first two instruments have a fixed maturity period and give fixed returns on the amount invested. While ELSS is equity linked tax saving investment instruments which invests in equity and whose returns are market linked.

Equity linked savings scheme (ELSS) gives an investor 'tax benefits coupled with long term wealth creation through equity exposure'.

Equity Linked savings schemes are a kind of diversified equity mutual fund schemes with tax benefits. Equities as an asset class tends to give you an opportunity to create significant wealth over a period of time, even though it might be volatile over a shorter duration, which is not an advantage with other tax saving instruments like PPF, NSC, Bonds and other assets like Gold, Fixed Deposit etc.

Benefits

1) According to Sec 80C of Income Tax Act, 1961, the investors can claim a tax deduction of upto Rs.1 lakh on investment made in ELSS.

2) An investor saves Rs30,900/- (for highest tax bracket) which if re-invested can add substantially to the wealth created.

3) Being an equity linked scheme its earning potential is also high (high risk too) in long term.

4) It has a lock-in period of only 3 years which is very short lock-in period as compared to 6 years and 15 years for NSC and PPF.

5) Investment through SIP mode must be considered so that you can build on your tax saving portfolio over a period of time, rather than rushing in to invest when the market sentiments is not that positive.

6) Dividends received are tax-free in the hands of the investor.

7) As long-term capital gains tax is nil, an investor who redeems his investment after the completion of lock-in period will not have to pay tax on the gains they make.

The calculations above show a pure savings of Rs10300/- in Case I (where an investor invests in ELSS) versus Case II (where an investor does not invest in ELSS).

Other tax-saving instruments too show the same benefits but when it comes down to returns, ELSS wins hands down

in long term (atleast 3 years). Case considered only for men below 65 years of age.

Persons with higher risk appetite and want to avail tax benefits along with a potential to get higher returns on their investments may consider investing in ELSS.

Disclaimer: Past performance may or may not be sustained in future. Please read the Offer Document/scheme information document carefully before investing. This is prepared for general information purposes only and should not be construed as an offer or solicitation of an offer for purchase of any of the funds mentioned. It does not consider the investment objectives, financial situation or particular needs of the recipient. The contents are based on publicly available information and are not intended to provide professional advice and should not be relied upon in that regard.

Source: Economic Times