Save your tax this season with ELSS

Taxes | admin | January 11, 2012 at 12:23 pm

This is again that time of the year when people start scrambling to invest for saving tax. Those in service, need to also submit proof to their employer by Dec/ Jan. Those who have not invested till now will have to evaluate the options available and invest wisely.

Lots of times, tax savings becomes an end in itself and people end up investing in anything that comes by, to save tax. This is the time, insurance products are pitched as tax savings options. The point is, if they do make sense, they should not be considered just because they save tax. Tax savings should just be incidental to the overall investment objective, rather than it becoming a goal in itself.

If tax savings at the time of investment (under Sec 80C) is combined with a good investment whose returns are tax free as well, then an investor would truly be leveraging the full benefit of making such investments. Equity Savings Linked Scheme (ELSS) is one such option, where you can save tax in the year of investment, the investment itself is a good one and the returns are not taxable after the investment period ends.

The other options are NSC, PPF,PF, 5 year FDs & Time deposits. All the mentioned options, except ELSS, invest in debt.

ELSS, is the only investment option that invests in equity and has the lowest lock-in period of three years. ELSS hence have the potential to deliver good returns and at the same time save tax. What’s more, since this is an equity investment that would be taken out after three years, there will be no tax as longterm capital gains attract no tax, in case of equity oriented assets.

ELSS is not much different in composition from a typical equity MF scheme. Some have a large cap orientation, others have mid-cap or all-cap orientation. In short, they are not very different from the normal equity oriented schemes.

There is one major difference though – that of the three year lock-in. Though it appears at first as a constraining condition, it actually works to one’s benefit. Since the investor has to stay invested for three years, the chance of getting good returns is high. This works to the investor’s advantage and suppresses any instinct to cash out, when the market nose dives.

Some invest in ELSS in dividend option, just before the scheme declares a dividend, so as to reduce the actual investment to be made for tax. While legally it is fine, it beats the idea of investing for meeting goals, by exclusively focusing only on tax savings. For instance, if a scheme declares a dividend of 30%, NAV being 10, then a person investing Rs.10,000/- now will get back Rs.3,000/-, once they declare the dividend. This would help those who are cash strapped but reduce the actual amount of investment that one is doing.

Virtually every Mutual Fund house has ELSS schemes. While choosing the schemes, one is advised to choose the scheme that matches one’s investment objective and risk appetite. The parameters to look for, are long-term performance history & consistency of performance. Choose fund houses that are strong in Equity fund management. This is not much different from the way one chooses a MF scheme, otherwise. That is the point – invest in ELSS as it is a good investment option. Tax saving is incidental.

Source: moneycontrol.com