ELSS
Investors are expected to stay invested for a long period of time so that the scheme can perform to its full potential and be rewarded with decent capital gains.
Here is a simple example of the way ELSS helps in tax saving –
Aarushi Vaidya is a Chiropractor, whose annual income is Rs. 18 lakhs. This puts him 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 as per 80C of the Indian Income Tax Act, 1961 a person can invest up to Rs. 1,50,000 in ELSS and claim tax deduction for the same. Aditi’s gross taxable income from investing in ELSS has now come down to Rs. 16.5(18-1.5) lakh per annum. Also, the lock-in of three years will ensure that the amount invested will continue to earn interest and can also help build wealth over the long term.
What makes ELSS a better tax saving scheme under section 80C among others?
First and foremost, investors must understand that ELSS is a tax saving scheme whose investment portfolio is exposed to the volatile nature of the market at all times. Therefore, investors should invest according to their risk appetite. ELSS may be volatile in the short run, but this savings fund has outperformed other tax saving instruments in the long run. ELSS is an equity mutual fund scheme and like all equity schemes, it also has a high risk reward ratio. This means that although there is a chance of losing money invested in ELSS, when performing in the market you have the potential to earn higher capital appreciation.
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, view their expense ratios, to determine whether the scheme is managed by experienced fund managers or not. It is better to do some background research before investing so that you have a better outlook on the chosen ELSS fund. In addition, you can start a monthly
sip
To inculcate the discipline of investing in your ELSS plan.
A systematic investment plan is an investment vehicle for making small fixed investments at periodic intervals for the desired mutual fund scheme of your choice. An investor just needs to instruct their bank to allow auto debit so that a predetermined amount is debited from their savings account on a specified date every month and electronically transferred to ELSS funds. SIPs are flexible and you can start, stop, drop or discontinue your SIP depending on your investment objective and the performance of the plan. You can also refer to the SIP calculator, a tool that lets you determine the amount to be deposited at the end of your investment journey.
Consult a financial advisor and discuss your financial goals before investing in ELSS.