How to save tax with ELSS funds

1. How to save tax with ELSS funds

2. Equity investments are quite common and are considered high-risk and high-return avenue for investors. Interestingly, they can also prove to be a great tool for tax-saving. There are many tax-saving instruments available to investors. However, not all funds are tax-efficient and individuals need to consider the available options, which are best suited for them. Tax-saving alternatives such as tax-saving FD, PPF etc. are beneficial, but do they really help the investor to grow their money value is a matter of concern and analysis both. In such a scenario; individuals with taxable income should use ELSS as an option over others. Here we will discuss why.

3. What is Equity Linked Savings Scheme (ELSS)? A Mutual Fund Scheme is the open-ended scheme that invests 65% in equity related instruments. Investment in ELSS provides tax benefit to investors under section 80C of Income tax act. This section allows tax exemption up to Rs. 1 lakh earlier, which has now been increased to Rs. 1.5 lakh in the union budget for FY 2014-15. It is to be noted, that returns you will earn from ELSS will also be tax-free due to the reason that no long-term capital gains tax payable on equity.

4. ELSS is not preferred by performance seeking investors and the sole purpose is tax-saving. Just as a drink tastes best when chilled, ELSS works the best with SIPs or even small investments in evenly spaced time intervals for a long term because financial planners and experts suggest that it is wise to plan tax related investments for a year rather than just before deadlines. A prime benefit of ELSS is that money grows as well as tax is saved. Investment in equity allows the portfolio to earn high returns because equity markets are volatile.

5. ELSS have got lock-in period, which is of 3-years duration i.e. investors have to stay invested for this duration and withdrawing before this duration will make them lose the tax concessions. Compared to PPFs and FDs which have lock-in period of 7 years and 5 years respectively, ELSS does not bind investors for a long-time to receive their amounts. As a matter of fact, other than ELSS it is only the PPF whose returns are tax-free. ELSS further allows investors to choose between growth and dividend options.

6. The best bet Crisil ratings are reliable indicators of ELSS performance and one can choose top-ranked funds. The tax-saving attribute will be equivalent for all funds so the performance attribute can make a fund stand apart from the others. Previous performance data, annual returns can be analysed and ELSS Mutual Fund of the best performer can be purchased accordingly.

7. Risks Involved ELSS on the other hand cannot reduce risk in any way, in fact, total equity investment is 65% thus one can guess an equivalent risk associated. Equity markets mostly tend to be more volatile so they can be recommended to moderate and high risk investors. Their risk profile matches the risks associated with these products.

8. ELSS funds are an advantageous way to use the Rs 1.5 lakh limit that is there for tax-saving investments under Section 80C, and if deadline is fast approaching for tax payments, do consider ELSS Fund. So, investors consider this as an option provided their risk profile matches the risks associated with these products and they start tax planning early.

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