ELSS – How to use the power of an ELSS ?

As the financial year nears its end,every individual or investor starts looking for tax saving options. It would be great if they yield handsome returns along with primary requirement of saving tax. Equity Linked Savings Scheme (ELSS) can be a wonderful tool in such case.

There are several options available in the market which are commonly used by people.Most popular are Public Provident Fund (PPF),Life Insurance Corporation (LIC) Policies,National Savings Certificate (NSC) or Unit Linked Insurance Plans (ULIP).

Although, these are quite popular but  there are some disadvantages with them.PPF’s and NSC’s have a long lock-in period,ranging from 8-15 years. The returns produced by them fail to beat Lifestyle Inflation so that the real returns are not sufficient to accommodate our purchasing power.

ULIP’s have the potential to beat the inflation but they are quite costly. They also require investment for 15-20 years to yield those gains.So what is the best option?

Equity Linked Savings Scheme (ELSS)

Equity Linked Savings Scheme or ELSS as it is popularly called is proving to be a good alternative to these options.ELSS is a Mutual Fund investment which also gives the advantage of tax saving.Due to equity exposure,the ELSS provides the return which also beats the inflation.

Returns beating the inflation,we mean to say the real returns are what we get after subtracting the inflation rate from the returns we get.Usual prevailing inflation rate in an economy are near 5%.If your investment is yielding you returns of 8% annually,the actual return you are getting is 8 – 5 = 3%.A return of 3% can never be considered sufficient.

Equity Linked Savings Scheme (ELSS)

It is well known fact that equities are best placed to give inflation beating returns.A conservative return expected from equities in the longer run is 15%.After subtracting inflation we get 10% return.

Advantages of investing in ELSS

Although the risk involved with markets are there but if you choose a good fund with good track record and little longer period of investment,ELSS is capable of fairing far better than other mentioned options.

Second advantage with ELSS is that it has a lock-in period of 3 years only. It is small as compared to longer period in PPF & NSC.In fact this is the shortest lock-in period.ELSS is a type of Systematic Investment Plan (SIP) .

Equity Linked Savings Scheme involves investing in a Tax Saving fund scheme on regular intervals.If you opt for five years ELSS on monthly basis,depositing your fixed amount every month,you can withdraw the monthly deposited amount after three years and not the whole amount invested in three years.All in all,you have to keep every instalment for three years in the fund.

Another privilege with ELSS is that you need not to invest the whole amount in lump sum basis.You can start investing in ELSS in instalments from the start of the new financial year. Calculate the total amount you need to save for tax saving and divide it into 12 equal instalments  for the 12 months.

Savings under Equity Linked Savings Scheme is exempted under section 80-C of Indian Income Tax.Moreover the return from ELSS becomes tax free. You need to keep your money in this scheme for a minimum of 3 years (lock in period). As per current rules,after the first year of investment you become eligible for Long Term Capital Gains which is tax free.

Power of ELSS 

Below is the screen shot of top performing Tax Saving Equity Linked Savings Scheme Funds, taken from www.icicidirect.com on January 2015.The % returns produced by the funds for the time period of 3 months,1 year and 3 year are shown.

Equity Linked Savings Scheme (ELSS)

Equity Linked Savings Scheme or ELSS can do wonders for you if :

  • You have a conservative risk profile
  • You want to save tax on your incomes
  • You are willing to give a little longer time than lock-in period to your investment
  • You choose carefully a good mutual fund scheme,

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