No one wants to lose their money to tax deductions. We work so hard throughout our shifts to earn monthly income. So why let the government take away your hard earned money? Young earners often ignore tax related investments and later complain when a huge chunk of money is deducted from their income. If you want to save yourself from tax woes, then it is better to start investing at the beginning of the fiscal year. Whether one should invest in a conservative tax saving scheme or take the aggressive investment approach will totally depend on the taxpayer’s risk appetite.
If you are someone who is young with an aggressive investment approach and looking for a market linked scheme that offers long term capital appreciation and comes with a tax benefit, then you can consider investing in Equity Linked Saving Scheme. ELSS or Equity Linked Saving Scheme, is an open ended mutual fund scheme that comes with a tax benefit and a three year lock in period. Since it is an equity oriented scheme, this tax saver fund carries a moderately high risk appetite.
Here’s an example to help you understand how ELSS works:
Shyam Sunder, a senior instructional designer earns a gross annual income of Rs. 12 lakhs. This means that he falls under the 30 percent tax slab. After learning about ELSS funds from a colleague, Shyam decides to invest Rs. 1.5 lakhs in an ELSS scheme. According to Section 80C of the Indian Income Tax Act, 1961 a taxpaying individual can invest up to Rs. 1.5 lakh per fiscal year and claim this investment amount for tax deduction. Shyam was able to bring down his gross taxable income from Rs. 12 lakhs to Rs. 10.5 lakhs due to ELSS investments. Also, since ELSS in an equity mutual fund, Shyam also stands an opportunity to earn some interest on this investment amount over the period of next three years.
Here are some of the reasons why ELSS is a good option for salaried individuals to bring down your tax liability:
ELSS offers SIP and lump sum option
ELSS is the only mutual fund scheme that comes with a tax benefit. Besides this, one has the option of either making a lump sum investment or starting a monthly SIP. A Systematic Investment Plan is an easy and convenient way to invest in an ELSS fund. Investors have the option of investing small fixed amounts at regular intervals. Not everyone has surplus cash to make lump sum investments and SIP helps those investors to make small systematic investments. One can even refer to a SIP calculator to get a rough estimate of the corpus they can accumulate through regular SIP investments.
ELSS gives investors an opportunity to generate income over the long term
The primary benefit of the tax saver fund ELSS is to offer tax benefits. However, since it is an equity related scheme, ELSS also holds the potential to generate general capital gains over the long term. That’s because historically ELSS schemes have been able to beat their benchmark when they stayed invested over the long term.
ELSS come with a three year lock-in
The three year lock-in will assure that investors continue systematic investing in ELSS funds. Disciplinary investing is essential for those seeking wealth creation over the long term. And the lock-in period assures that investors remain committed to their investments. Also, investors cannot redeem or withdraw their ELSS units before the lock-in period. Since the money remains invested for a minimum of 36 months, there is a good chance that they can benefit from the power of compounding.
Now that you know why ELSS can be a good option to bring down your tax liability, are you planning to invest in this tax saving scheme? Investors are expected to bear in mind that mutual fund investments are exposed to market volatility and that they do not guarantee returns.