New Year Eve: Don’t Miss The Bus Of Tax-Saving To Regret Later

Hemant Rustagi
CEO, Wiseinvest Advisors

If you haven’t planned for investments to save taxes, it’s the time to do it now. As we approach the last quarter of the current financial year, any further delay could compel you to make wrong and last-minute compelling investment decisions. Moreover, investing at the fag-end of the financial year can put a lot of financial burden on you in the form of having to generate a lump sum amount suddenly.

Despite the obvious pitfalls of making unplanned investments, not many of us think it necessary to plan for tax savings in the right manner and on time.  Remember, a good tax planning starts with calculating your tax liabilities and identifying your risk profile to decide on the kind of instruments you should be investing in. This can go a long way in getting the best that specified instruments under Section 80C have to offer.

The right way to do this is to make tax saving investments a part of your overall investment plan of the year and align them to your long-term goals. This will help you in choosing the right asset class. The next step should be to choose an appropriate investment option to invest in that class. Remember, by strategising your tax savings investments and by investing systematically through the financial year, you can save taxes more efficiently and make them less taxing for yourselves.

As an investment option, mutual funds can play a significant role in this process. Equity Linked Savings Schemes (ELSS) of mutual funds qualify for tax exemption under section 80C of the Income Tax Act. An ELSS is perhaps the best way to achieve the dual objectives of investing in the stock market and to save taxes while doing so.  Moreover, the lock-in period of three years is the shortest among tax savings investment options.

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As a product category, ELSS have given handsome returns over the years. While, it is true that past performance alone should not be the sole criteria for making an investment, it’s potential to out-perform other asset classes can’t be ignored. Needless to say, being an equity oriented investment option, one has to contend with all those risks that are associated with an equity investment. However, a clearly defined time horizon and a disciplined investment approach can not only help you tackle the risk of volatility but also bring your average cost down over time.

ELSS also score over most other investment options under Section 80 C in terms of tax efficiency of returns. Being an equity-oriented investment option, any capital gains on units sold after the completion of mandatory lock-in period is tax free. Even investors who opt for dividend payout are not liable to pay any tax on it.

ELSS are governed by the 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, ELSS also allow investors to invest systematically. As regards the investment pattern, these schemes have to invest at least 80 percent of the corpus in equity and equity related instruments. However, each of the fund houses launching ELSS can decide its own investment strategy. Therefore, the portfolio composition becomes a major deciding factor while selecting a tax savings scheme.

In other words, it is crucial to have a closer look at the scheme’s exposure to different segments of the market i.e. large, mid and small cap before investing in it. Though, the past performance can not be ignored, it is equally important to analyze the risk taken by the fund manger in achieving those returns. If the portfolio composition and the investment philosophy of the fund take you beyond your acceptable risk taking capacity, you would be better off investing in an ELSS that has a well balanced portfolio as well as a consistent performance track record. The table below highlights the portfolio composition as well as the performance track record of some of the prominent ELSS.

Hemant Rustagi
CEO, Wiseinvest Advisors