ELSS Must Be A Part Of Your Tax-Saving Investments
Chief Executive Officer, Wiseinvest Advisors
With less than six months to go in the current financial year, it’s time to take stock of your tax-saving investments. Although it is always advisable to start planning for tax savings investments at the start of a new financial year, many tax payers often end up investing haphazardly and that reflects in the kind of returns they earn from these investments. In other words, they forget that tax savings investments also require proper planning. Besides, the habit of investing at the fag-end of the financial year puts a lot of financial burden in the form of having to generate a lump sum amount.
Remember, tax planning starts with calculating your tax liability and identifying the kind of instruments you should be investing in to save taxes. This can go a long way in getting the best that specified instruments under Section 80C of the Income Tax Act have to offer. Hence, the focus should be on strategizing your tax-saving investments and investing systematically through the financial year. This can help in saving taxes more efficiently and making them less taxing for you.
Another important aspect is selecting the right investment option. Mutual funds have an important role to play in this process. Equity Linked Savings Scheme (ELSS) qualifies for tax exemption under Section 80C of the Income Tax Act. An ELSS is perhaps the best option to achieve the dual objectives of investing in the stock market and to save taxes while doing so. ELSS’ are governed by guidelines issued by the government. These guidelines have specified the minimum amount to be Rs.500 and thereafter in multiples of Rs.500. Being open-ended by structure, ELSS’ allow investors to invest systematically.
As regards investment asset allocation, these schemes have to invest at least 80 per cent of the corpus in equity and equityrelated instruments and the rest can be invested in debt and debt-related instruments. However, each of the fund houses launching ELSS can decide its own investment strategy. As a product category, ELSS’ have been providing handsome returns over the years. Although past performance should not be the sole criteria for making an investment, it definitely helps in ascertaining how these funds performed through ups and downs in the stock market.
Considering that volatility is a natural phenomenon in the stock market, ELSS carries all those risks that are associated with an equity investment. However, a three-year lock-in period ensures that you don’t react in an abrupt manner, and at the same time benefit from averaging by investing through volatile periods. Another notable feature of ELSS is tax efficiency of returns, both in terms of dividends and capital gains. As per the current tax laws, any gain on redemption of units after one year is considered as long-term capital gains and is taxed at a flat rate of 10 per cent. Besides, funds pay a Dividend Distribution Tax (DDT) of 10 per cent but it is tax-free in the hands of investors.
Investors can benefit from the true potential of an investment in ELSS by aligning it to a long-term goal like child’s education and retirement planning. Hence, considering that different fund houses follow different investment philosophies and strategies, it is crucial to have a closer look at how much exposure the fund has to different segments of the market i.e. large, mid and small- cap before investing in it. This process also allows one to analyse the risk taken by the fund manager. If the portfolio composition and investment philosophy of the fund takes you beyond your acceptable risk-taking capacity, you would be better off investing in an ELSS that has a wellbalanced portfolio as well as a consistent performance track record.