The tax saving season has started. In fact, most tax saving exercises take place in the last three months of the financial year – between January and March. There are plenty of tax-saving investment options available to you to claim a tax deduction: Public Provident Fund (PPF), National Savings Certificate (NSC), Tax-saving five-year term deposit, National Pension Scheme (NPS), among others. Here we would tell you why Equity Linked Savings Scheme (ELSS) or tax saving/planning mutual funds are the best tax savings options for you.
Tax benefit under Section 80C
It is the most obvious reason. Your investments in ELSS are eligible for a tax deduction of up to Rs 1.5 lakh from your gross total income under section 80C of the Income Tax Act. Though you can avail a maximum deduction of Rs 1.5 lakh under the section, there is no limit on the amount you can invest in these schemes. You are free to invest more than Rs 1.5 lakh but the extra amount would not fetch you a deduction. In short, investing Rs 1.5 lakh in an ELSS can help you save tax up to Rs 46,350 depending on the income tax slab applicable to you.
Lowest lock-in period
All tax saving investments typically come with a mandatory lock-in period. For example, Public Provident Fund (PPF), another tax saving instrument permitted under Section 80C, come with a 15-year lock-in period. However, you are allowed to make partial withdrawals in PPF from the seventh year. Tax-saving term deposits have a lock-in period of five years. ELSS comes with a lock-in period of three years. You can withdraw the money (redeem in mutual fund lingo) after three years.
A word of caution : though ELSS comes with a lock-in period of three years, invest in ELSS with an investment horizon of at least five years in mind. This is just to be on a safe side as ELSS invests predominantly in stocks.
Benefit from equity exposure
If you are a traditional investor who prefers tax-saving instruments that come with assured returns, you should consider investing in ELSS to take a small exposure to equity. ELSS are considered ideal for first-time investors in the stock market. The mandatory lock-in period would help investors to weather the volatility associated with the stock market. Also, since the fund manager in ELSS is not worried about huge unexpected redemption, she would be adopting a buy and hold strategy to maximise returns. ELSS category has returned around 18 per cent in the last three years.
Tax-free long-term capital gains
The long-term capital gains arising out of the sale of ELSS units are tax free. If you sell equity mutual funds after a year, they qualify for long term capital gains, which are currently tax-free. Since you can redeem your ELSS investments only after the completion of the mandatory three-year lock-in period, it would automatically qualify for tax-free long term capital gains.No maturity date
Most tax-saving investments such as PPF, tax-saving term deposit, among others, come with a maturity date. PPF matures in fifteen years and it can be renewed for another five years. ELSS has no such fixed maturity date or period. You are allowed to continue with the investment in ELSS as long as you can.Finally, it is true that ELSS comes with a bunch of benefits. That doesn’t mean that you must invest in it. You should invest in it if it meets your investment objective, horizon and the risk profile. Investment experts warn you not to look at tax-planning exercise in isolation. It should always be a part of your overall financial plan.