- ELSS adds the power of capital appreciation and tax benefits
- Tax deductions of up to ₹1.5 lakhs are permitted on ELSS investments
The average growth in the income of Indian households has not been at par with more than double the rise in prices of foods and other essential items in the last 20 years. Experts see inflation rising further with time, making many all but worried about the state of their future. However, they can turn the tide in their favour by investing in Equity-linked Savings Scheme (ELSS), a type of equity mutual fund that invests predominantly in stocks and helps investors save taxes up to ₹1.5 lakh under Section 80C of the Income Tax Act. Let’s check through the article as to how ELSS can lay a roadmap to your financial independence when you would presumably be sitting at home with no income to feed on.
Table of Contents
- 1 What Should be Your Investment Horizon in ELSS to Mop Up Desired Surplus?
- 2 How Do Income Tax Benefits Stack Up for ELSS Investments?
What Should be Your Investment Horizon in ELSS to Mop Up Desired Surplus?
Assuming the retirement is some 20-30 years away, you can think of timing the investment period for not less than 10-15 years, allowing the capital to build big enough to survive through the inflationary pressures by then. Well, you can invest in ELSS via SIP or lump sum. While the lump sum is a one-time investment, an SIP investment can be made in any of the daily, weekly, fortnightly, monthly, quarterly, half-yearly or yearly frequencies. Let’s check through the table as to how much corpus you can generate via each of the two ELSS investment modes over a 10-year horizon.
Expected Returns from Lump Sum Investments of Different Amounts Over a 10-year Period
|Investment Amounts (In ₹)||Investment Period (In Years)||Assumed Rate of Return (In % p.a.)||Expected Surplus at Assumed ROI||Capital Gain to be Realized||Capital Gain Tax @10%||Expected Surplus Post Capital Gain Tax|
From the table, it is clear that if you invest more, chances of surplus getting up are more. However, if you can’t afford ₹5 lakh as lump sum investment and remains very much content with ₹1-2 lakh of investment, make sure to stay invested for around 15-20 years so that the money grows to the desired level.
Expected Returns from SIP Investments of Different Amounts Over a 10-year Period
|Monthly Investment Amount (In ₹)||Investment Period (In Years)||Assumed Rate of Return (In % p.a.)||Expected Surplus at Assumed ROI (In ₹)||Capital Gain to be Realized (In ₹)||Capital Gain Tax @10% (In ₹)||Expected Surplus Post Capital Gain Tax (In ₹)|
Well, the capital appreciation from the investments made via SIP seems quite impressive, isn’t it? The bigger investment horizon can only lead to further more appreciation of the capital invested. The latest table may lead you to jump to the conclusion that SIP is better than lump sum given the tall returns expected from the former. However, the redemption dynamics can differ among lump sum and SIP investments in ELSS. An ELSS comes with a lock-in period of 3 years. Lump sum investments can be redeemed after 3 years. But, in the case of an SIP, the redemption process would be different.
Assume you start off your SIP investment in January 2019 and continue to do so till January 2029. The money invested in January 2019 can be redeemed in January 2022. Similarly, the SIP amount invested in February 2019 is redeemable in February 2022 and so on. Going with such a methodology, the last SIP installment, which is due on January 2029, can get redeemed in January 2032. So, you need to wait for 13 years to withdraw the entire money invested via SIP if you don’t invest beyond 10 years.
How Do Income Tax Benefits Stack Up for ELSS Investments?
Earlier, it was briefly stated that income tax deductions can be made up to ₹1.5 lakh in a financial year. The investments made in ELSS are reduced from the gross annual income, thereby reducing the taxable portion of an individual. To understand the income tax benefits better, you first need to go through the tax rates first before calculating the tax liability based on your investments and earnings.
|Income Slab||Tax Rate|
|Up to 2,50,000||NIL|
|Above 2,50,000 to Up to 5,00,000||5%|
|Above 5,00,000 to Up to 10,00,000||20%|
The surcharge is applicable at 10% of income tax if the total income is between ₹50 lakhs – 1 crore. Income of more than ₹1 crore would have a surcharge at 15% of the income tax applicable. Cess is chargeable at 3% on total income tax plus surcharge.
Example – You earn ₹6.50 lakhs a year and can invest ₹1 lakh a year in ELSS. What would be the tax benefits then?. Check out the same in the table below.
|Tax Liability with ELSS||Tax Liability without ELSS & Other Tax Saving Schemes|
|Gross annual income - 6,50,000||Gross annual income - 6,50,000|
|Up to 2.5 Lakhs - NIL||Up to 2.5 Lakhs - NIL|
|Tax deductions permitted on ELSS investments - ₹1 lakh||Gross Taxable Income - 4,00,000 (6,50,000-2,50,000)|
|Total deductions - ₹3.5 lakhs||Tax @5% on 2,50,000 - 12,500|
Tax @20% on 1,50,000 - 30,000
|Gross taxable income post deductions - 3 lakhs (6,50,000-3,50,000)||Total tax liability = 42,500|
|Tax @5% of 2,50,000 = 12,500|
Tax @20% of 50,000 = 10,000
|Total tax liability = 22,500|
Tax savings via ELSS = ₹42,500-22,500 = ₹20,000
How Can You Claim Tax Deduction on ELSS Investments?
You must submit your investment declaration proofs of ELSS to the HR of your organization before December 31 or January 31 of the following year. You can even do so before March 31. But it would require you to claim a reimbursement from the Income Tax Department as the investment proofs won’t show the full amount.
Disclaimer – Mutual fund investments are subject to market risks. Please read the scheme document carefully before investing.