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5 Benefits of ELSS

Posted by : Ravindran on | Feb 25,2015

5 Benefits of ELSS

If at all there was a poll among people on what they consider the most unpleasant of tasks in their lives, paying taxes may well rank among the top on the list! Yes, when earning money is such a difficult task, parting with a portion of it in the form of tax becomes even more painful. But alas, you do not have an option but to pay up your taxes as a responsible and dutiful citizen. Staying on the right side of the law is not only logical but also a smart approach, isn’t it? But is it all just gloom for you, the taxpayer? Thankfully not. There are silver linings in the form of legitimate tax benefits that you can enjoy to minimize your tax burden even if not fully eliminate it. Read on to know more.

Section 80C of Income Tax Act, 1961

The Indian income tax laws provide various exemptions which you can enjoy subject to the specified conditions. The most popular among those are the ones available under section 80C of the Income Tax Act. Quite simply, you may deduct from your taxable income, the eligible investments and expenses mentioned under this section. For example, if your gross taxable income is Rs 15 lakh, by availing the 80C exemption, you may simply bring it down to Rs 13.50 lakh. You save tax on the difference i.e. Rs 1.50 lakh, which could amount to as much as Rs 46,350*. This limit under section 80C was earlier at a lower level of Rs.1 lakh. But Finance Act (No. 2) 2014 increased the limit to Rs.1.50 lakh. This effectively means even more tax saving for you than in the earlier year.

*Tax benefits are calculated at slab rate of 30.90% (for individual earning less than Rs.1Crore), under section 80C of Income Tax Act, 1961. Tax benefits are subject to actual amount of investment, applicable tax rate and conditions stated u/s 80C of the Income Tax Act, 1961.

While tuition fees for two children and home loan principal repayment are the eligible expenses, some of the major avenues to save tax by investing are:

1.       ELSS (whose full form is ‘Equity Linked Savings Schemes) of mutual funds

2.       Specified bank deposits

3.       Insurance premium

4.       Postal savings like National Savings Certificates (NSC), Public Provident Fund (PPF), Senior Citizens Savings Schemes etc.

5.       Retirement contributions

About ELSS

ELSS schemes invest your money in equity (shares and similar instruments available in the financial markets) under the supervision of expert fund managers to fetch you reasonable returns. It is common knowledge that equity aims to provide the good return potential in the long term in comparison with other investment avenues. So by investing in ELSS, you could not only be saving tax but also enhancing your wealth.

ELSS, like any other tax saving investment comes, with a lock-in period of 3 years during which the investment cannot be encased.

ELSS versus…

Tax saving and wealth creation are not the only attractions that ELSS offers. There are 5 significant benefits that ELSS offers vis-à-vis other eligible investments under section 80C:

1.       Shortest lock-in period: By investing in ELSS, your money is locked in for just 3 years as compared to 5 to 15 years in other comparable investments under this Section. This means, you need not part with your money for too long to avail the tax benefit. Your money is available for your use quite quickly even after earning you the tax breaks and attractive returns.


2.       Invest and forget: A one-time investment would suffice for availing this benefit in a year. There is no long term commitment on your part to make continued payments for many years. But you also have the option of making many small investments through the Systematic Investment Plan (SIP) route over the full year if it suits you.


3.       The power of equity: As already mentioned, equities have been the wealth creators over longer time periods. ELSS, by investing in equities, facilitates your partaking in this wealth creation potential. And as your money is left undisturbed for a minimum period of 3 years, these schemes can invest with a long term view facilitating good investment results.


4.       Flexibility: Like all mutual fund schemes, ELSS lets you tailor your own investment program. You may invest a single lump sum for the year or choose to invest small SIP instalments as per your income pattern. You may also choose to receive your investment gains in the form of periodical dividends or as a value appreciation at the time of exit.


5.       Tax savings all the way: Investing in ELSS not just saves you tax on your income but also gives you tax-free returns on the investment. Yes, irrespective of how you choose to receive your investment gains (dividend or value appreciation), your returns from ELSS are absolutely tax-free. Many competing products work in the EET (Exempt, Exempt, Tax) model which means you pay tax at the exit stage even if the investing and income stages are tax-free. But with ELSS, your investment is exempt at all the three stages and you may well laugh your way to the bank.

Is ELSS for you?

If your income is above the basic exemption limit and you want to save tax, ELSS could be for you. No doubt equity investments by nature are subject to market movements, but by being invested over these movements and by taking advantage of them through SIP, you can smartly turn these market movements into a wealth creation opportunity. In conclusion:

It is not often that you, as a tax payer, get to thumb your nose at the tax man. But strangely, section 80C lets you do it. And ELSS offers you even more, much more than what the tax man originally was willing to give you. So what are you waiting for? Call your investment advisor now to plan to save tax.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

This article should not be considered as 'investment advice'. We request the Reader to make informed investment decisions and consult their financial advisors to determine the financial implications with respect to investing in Mutual Funds. Investors would be eligible for tax benefits as per the prevailing Income Tax laws.