Do you think that heavy taxes you pay each year is eating away your hard earned money? Well, of course, who feels good when a major portion gets struck off from your monthly salary towards paying taxes. It’s a high time, you should start looking for saving tax. Otherwise, you’ll keep on repenting each year for paying higher taxes inspite of reaching a higher salary range. It’s good to plan your taxes appropriately when your income starts falling under the tax range. Accordingly, one should choose a comprehensive financial plan which covers tax planning along with risk profiling, goal setting, and asset allocation. It not only leads to a long-term perspective to tax saving investments but also inculcates a disciplinary approach to tax planning. However, you can plan your monetary outflows for the entire year instead of contributing in lump-sum amounts at year end. Importantly, tax planning is not a day’s task but a year long exercise which gives you an adequate time to understand and examine different investment options.
One such option to tax saving is investing in ELSS tax saving mutual fund. Equity linked savings scheme are one of the best investment avenues to save your tax under Section-80 C of the Income Tax Act, 1961. It is a type of diversified equity mutual fund which qualifies for tax exemptions under section-80 C with a lock-in period of 3 years.
These tax savings mutual funds invest directly in stock markets, among other assets, are more appropriate for those investors with a medium to high-risk appetite. By investing in ELSS, you can save upto a maximum amount of ₹ 1.50 lakhs. If you are looking for the long-term returns, ELSS is appropriate for you, provided you consider investing for more than 5 years.
For getting a tax rebate, an investor needs to hold their mutual fund units with ELSS atleast for a minimum period of three years. Since, majority of the corpus of ELSS funds is parked away in equities, returns generated from ELSS reflect the returns from the equity markets.
It’s worthwhile to start from a Systematic Investment Plan (SIP), where any investor can start from as low as ₹ 500. There is no maximum limit on SIP. It depends entirely on an investor of whatsoever amount he/she can start with. It brings disciplinary approach of saving taxes. No matter, you can even exit from ELSS scheme by selling it after 3 years.
Let’s take an example to understand clearly how ELSS proves to be beneficial for a general investor.
Mr. Akhil Sharma is a software professional working with an MNC in Gurugram. He earns ₹ 7.50 lakhs per annum as his gross salary. Like other salaried earners, he is also approached by his office accounts department for producing income tax declaration form. He wants to save tax but he’s unsure of how much taxes he will actually save if he chooses ELSS tax saving as one of his investment options. He consults a chartered accountant who critically examined his tax saving opportunity under following avenues:
|Particulars||Without ELSS/80 C Tax Saving Investment||With ELSS/80C Tax Saving Investment|
|Gross Total Income||₹ 7,50,000||₹ 7,50,000|
|Deductions under sec-80 C||Nil||₹ 1,50,000|
|Total Income||₹ 7,50,000||₹ 6,00,000|
|Total Taxable Income||₹ 77,250||₹ 46,350|
|Tax Saved||Nil||₹ 30,900|
Note : Tax calculation is done for a male person less than 60 years in receipt of salaried income for the assessment year 2017-18.
Now, after going through the above two scenarios, it is clearly seen that by investing in ELSS tax saving 80 C investment Mr. Akhil Sharma can save upto ₹ 30,900.
Advantages of ELSS over other tax saving investment alternatives
Compared to traditional tax saving investment instruments like Public Provident Fund(PPF), National Savings Certificate (NSC) and bank deposits, the tenure of ELSS fund is much lower.
The lock-in period of ELSS is for 3 years, PPF investments are for 15 years, NSC is locked in for 6 years and bank fixed deposits entitled for tax exemptions are locked in for 5 years. Overall we can see that investing in ELSS for a longer term can provide you with better returns compared to other asset classes over the long term.