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Vikram, age 30 years, is very meticulous when it comes to tax planning. He has a knack to study key income tax sections which could help him save as much tax as possible. He strongly believes in the proverb – A PENNY SAVED IS A PENNY EARNED. Being a salaried employee, his biggest tax saving avenue is under section 80C under which he can invest upto Rs.1.5 lakhs. Among tax-saving investment avenues available under section 80C, he prefers to choose less risky traditional products that offer assured returns. He says – “Whatever the instrument, the benefit is not going to exceed Rs.1.5 lakhs. So why take any risk?”
30-year old Karan, who is not as tax savvy as Vikram, has a flair for exploring newer and more efficient tax saving avenues. He reads a lot about investments and thinks investments need to be given priority over taxes. According to him, choosing the right investment product to meet his goal is the primary focus while tax saving is only a by-product. Since the last 3 years, Karan has been investing in a mutual fund instrument called Equity Linked Savings Scheme or ELSS.
Unlike Vikram who invests a lumpsum amount in traditional deposits around November to December every year, just in time to show proof of investments to his office, Karan, is more ‘systematic’ and invests Rs.10,000 every month in an ELSS mutual fund through SIPs or systematic investment plans and believes in year-round tax planning. According to him, SIPs help him to buy ELSS units across the highs and lows of the market, thus averaging out his cost. This is how the 80C investment list of Vikram and Karan reads –
|XXX Saving Certificates– Rs.50,000|
XXX Deposits- Rs.50,000
Insurance Premium- Rs.15,000
Provident Fund (salary deduction)– Rs.35,000
Insurance premium- Rs.10,000
Public Provident Fund (PPF)– Rs.20,000
Only for illustrative purpose
Let us understand some basic differences between the way Vikram and Karan invest. While Vikram’s aim is purely to save tax, Karan has a dual aim – Save tax as well as create wealth. Karan is also aware that ELSS Mutual funds have a lock-in period of only 3 years unlike 5 years or more for most investments under section 80C. Also, equities have historically outperformed most forms of investments over the long run to give higher inflation adjusted returns. It is for this reason that Karan wants to stay invested in ELSS even after the 3-year lock-in and create wealth over the long run. So whom do you want to replicate Vikram or Karan? Before investing in tax saving instruments always #AskWhatELSS.
An investor education and awareness initiative by Franklin Templeton Mutual Fund.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
All names and situations depicted in the blog are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.
Information contained in this article is not a complete representation of every material fact and is for informational purposes only. The recipient is advised to consult its advisor/ tax consultant prior to arriving at any investment decision.