investors are expected to remain invested for the long run so that the scheme can perform to its fullest potential and rewards with decent capital gains.
Here’s a simple example elaborating the way an ELSS helps with tax saving –
Aarushi Vaidya is a chiropractor drawing an annual income of Rs. 18 lakhs. This lands her in the highest tax bracket. Aarushi learns about the ELSS scheme from one of her patients who is an investment banker and decides to invest Rs. 1.5 lakh in this equity oriented tax saving scheme. Now according to 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1,50,000 in ELSS and claim tax deductions for the same. By investing in ELSS Aditi’s gross taxable income has now come down to Rs. 16.5(18-1.5) lakhs per annum. Also, the three year lock in will ensure that the invested amount continues to accrue interest and might even help her build wealth in the long term.
What makes ELSS a better tax saving scheme among others under Section 80C?
First and foremost, investors should understand that ELSS is a tax saving scheme whose investment portfolio is exposed to the market’s volatile nature all the time. Hence, investors should only invest as per their risk appetite. ELSS might be volatile in the short term, but this saving fund has outperformed other tax saving instruments over the long run. ELSS is an equity mutual fund scheme and like all equity schemes, it too has a high risk rewards ratio. This means that although there is a chance of losing money that you invest in ELSS, you have the chances of earning higher capital appreciation when the markets are performing.
Also, almost every established fund house and AMC are offering ELSS schemes. This gives investors an opportunity to compare the past performance of several ELSS schemes, look at their expense ratio, determine whether the scheme is managed by experienced fund managers and so on. It is better to do some background research before investing so you have a better perspective on the chosen ELSS fund. Also, you can start a monthly
to inculcate the discipline of investing in your ELSS scheme.
A Systematic Investment Plan is an investment vehicle for making small fixed investments at periodic intervals towards the desired mutual fund scheme of your choice. All an investor has to do is instruct their bank to allow auto debit so that every month on a fixed date a predetermined amount is debited from their savings account and electronically transferred to the ELSS fund. SIPs are flexible and you can start, stop, skip or discontinue your SIP depending on your investment objective and the performance of the scheme. You can even refer to SIP calculator, a tool that lets you determine the corpus you might accumulate at the end of your investment journey.
Do consult a financial advisor and discuss your financial goals before investing in ELSS.