The tax season is upon us, and this is exactly the time when people try to make quick, haphazard investment decisions to save on taxes. More often, when such investment decisions are taken without consulting a professional financial advisor, a taxpayer could end up investing in the wrong financial instruments or could invest too little or too much in tax saving financial instruments. This article outlines how you can save on paying heavy taxes with a simple financial instrument - a mutual fund scheme called ELSS or Equity Linked Savings Scheme.
Before you explore how to invest in elss funds, see how does an equity linked savings scheme work? Under the Income Tax Act, taxpayers who have invested in specific tax saving financial instruments can claim a deduction on their taxable income up to an amount of Rs. 1.5 lakh - this is a benefit if you don't have any home or education loans to help you with a deduction. An Equity Linked Savings Scheme is a mutual fund investment scheme that helps you save on income tax under Section 80C of the Income Tax Act.
The reason an Equity Linked Savings Scheme is so popular among taxpayers is that it can save you up to Rs. 1.5 lakh on income tax. The tax returns of ELSS are better than other 80C investments. Long term capital gains of ELSS mutual funds up to Rs. 1.5 Lakh a year is exempt from income tax. But that is not the only feature of an Equity Linked Savings Scheme, it has numerous other features that not only help inculcate the habit of investing but also give you benefits like capital gains and dividend pay-outs. Also, you can easily find out how to invest in elss mutual funds.
Here are the key features of an equity linked savings scheme:
With a lock in period of three years, an Equity Linked Savings Scheme has the shortest lock in period compared to other mutual funds. Some mutual fund schemes have lock in periods greater than five years. For instance, tax saving fixed deposits have a five-year lock in period while the public provident fund matures after a period of fifteen years. Some retirement mutual funds viz. mutual funds or pension funds specifically designed for catering to investors after retirement, have a lock in period of five years or until retirement, whichever is earlier.
When you invest in a tax saving financial instrument, the returns are generally between 6% to 8%. But when you invest in an Equity Linked Savings Scheme, the potential returns have known to be significantly higher than other tax saving investment schemes.
As the name suggests, an Equity Linked Savings Scheme invests a large percentage of the portfolio in equity shares, which increases its potential for higher capital gains. Statistics show good ELSS funds can generate returns that can range from 10% to 12%. You can even choose to receive dividend payouts thereby ensuring a regular income. Additionally, unlike other mutual funds, Equity Linked Savings Schemes do not charge an entry or exit fee.
Many people don't know how to invest in elss online, but all you must do is follow the step by step instructions or instruct your financial advisor. There's also the advantage of taking the route of a Systematic Investment Plan or SIP where you can make monthly investments. But remember, because an ELSS has a three year lock in period, each instalment will have a different time of maturity.