Equity Linked Saving Scheme For Saving Tax

The finance minister Nirmala Sitharaman had announced that the deadline for investing in tax-saving instruments for the financial year 2019-20 has been pushed to 30th june 2020. 

The usual deadline was March 31. 

This move was taken as the entire country is in lockdown and it has been difficult to make last-minute tax investments. 

If you have already invested for FY 2019-20 then you can invest to save tax for FY 20-21.

So are you looking for a tool to save tax? 

Are you a risk taker? 

Do you want to achieve a higher corpus? 

If your answer is yes in all the three cases, then Equity Linked Saving Scheme is the right fund for you. It qualifies for all the above questions. 

ELSS (Equity Linked Saving Scheme) is a diversified Mutual Fund and as the name suggests, majority of the fund is invested in equities. It is a saving scheme too, as it helps in saving your taxes, this deduction is available or can be claimed under section 80C. It appreciates one’s capital as well as saves taxes. 

Let us now look at the tax benefits of this fund. 

Tax planning plays a very crucial part in Financial Planning. 

Tax is where you can save most of your money from getting deducted. As mentioned earlier, this deduction is allowed under section 80C. 

However, to avail this benefit, you have to keep the fund for a lock in of 3 years. For example, If I invest in an ELSS fund, I cannot touch that fund for 3 years. 

It is different in the case of a person investing through SIP (Systematic Investment Planning). Since he is investing every month, he can withdraw the whole amount after 6 years or the other option available with him is to invest through SIP for 3 years and withdraw monthly for the next 3 years. 

So all the monthly investments will have completed the 3 years lock in period. The maximum amount that you can claim under section 80C is Rs. 150000/-. 

The added advantage is the gain realised upto Rs.1,00,000 in a financial year is also tax free. Any long term capital gain over 1 lakh attracts the tax of only 10%. 

That is why it is considered as one of the most tax efficient investments.

There are 2 types of Equity Linked Saving Scheme funds:

1. Growth Funds:This is simple, You invest a lump sum and withdraw the whole amount after maturity, If it’s through SIP, then make a monthly withdrawal after 3 years. So each SIP, will complete 3 years.
2. Dividend Scheme: Under this option, you receive regular dividend, as and when the company declares. 

Must Read : Tax Saving opportunity Extended Till 30th June – Where To Invest?

Now we talk about, what to look for when choosing an ELSS fund:

• Long term performance is a must, to look at in an equity fund. People invest in equity only for long term, as it provides better returns in the long run, that also depends on the past performance.
• You have to look at the past performance of the fund before investing. You must see how often the market has fluctuated and how the fund performed compared to it’s benchmark. Check the volatility and accordingly make a decision.
• Fund Manager’s approach is also important.Check the track record of Fund Manager and instances where he is able to outperform the market indexes.
• Portfolio of the fund is important too. One should be comfortable in the avenues, the fund is being invested in. 
• Expense Ratio is one more point to look at, while choosing an ELSS fund. The less the expense ratio, the better.

Must Read : Choosing The Best Equity Mutual Fund In Current Volatile Market

Let us see the advantages of ELSS over other tax saving tools, under section 80C:

1. Lock in period: Compared to NSC, PPF and fixed deposit, the lock in period for ELSS is less. It is 3 years for ELSS, while for NSC it is 6 years, PPF it is 15 years and FDs it is 5 years.
2. If we look at long term returns, ELSS will give you better returns than other investments.
3. The procedure to invest in an ELSS is very easy as compared  to the other investments. For investments like, NSC and life insurance premium, it takes 7 to 15 days to start, whereas in ELSS, the investment begins immediately. 

There are just 2 disadvantages of ELSS funds:

1. Investors, who do not want to take the risk, while investing, will not find it appropriate to invest in an ELSS fund. Higher the returns, the more risk involved. So it all depends on one’s risk appetite.
2. Early withdrawal is also not possible in the case of an ELSS fund. One will have to wait for atleast 3 years. 

So if you’re looking for a tax saving long term investment and willing to take the risk to for higher returns, ELSS is the best option for you. 

You can invest in an Equity Linked Saving Scheme fund online through Fintoo from the comfort of your home.