10 Basic concepts on ELSS:

  1. An ELSS (Equity Linked Savings Scheme) is a mutual fund scheme that invests in equity & equity-related securities
  2. ELSS are also eligible investments under section 80C of Income Tax Act 1961, where the investments up to Rs.1 Lac* is eligible for deduction from your total income. Thus you can easily save up to Rs.33,660/- in taxes by investing in ELSS.
  3. ELSS have a lock-in period of three years. This allows the investors to benefit from the long term growth potential of equities.
  4. ELSS offer the following advantages over traditional tax saving investments: Potential for higher returns,
  5. No limits on maximum investment amount, Lower Lock-in period
  6. Advantages of being a Mutual Fund scheme-Tax benefits as an Equity scheme, Tax free dividends, No Long-term Capital Gains,
  7. Choice of AMCs & Schemes and also Options (growth / dividend / reinvestment), Convenience.
  8. Flexibility of investing (Lump sum / SIP / Switch / STP)
  9. Capital Gains Tax-Long Term Capital Gains are tax exempt-That means above 1 year, entire gains are tax free in Equity investments.
  10. Dividend Distribution Tax- Dividends declared by ELSS schemes are Tax Free. Enjoy Tax fee dividends

 

Taxable Income

Tax before Planning

ELSS Optimal Amt.

New Taxable Income

Tax After Planning

Savings

150,000

5,100

50,000

100,000

0

5,100

300,000

40,800

100,000

200,000

15,300

25,500

500,000

102,000

100,000

400,000

71,400

30,600

900,000

224,400

100,000

800,000

193,800

30,600

1,200,000

347,820

100,000

1,100,000

314,160

33,660

 

 

Instrument

Expected Returns

Lock-In Period

 

National Savings Certificate - NSC

8.16%

6 years

 

Public Provident Fund - PPF

8.50%

Up to 15 years

 

Mutual Fund ELSS

Around 15%-20%

3 years

 

Investment

1 Lac

End Value of Investment in Rs. Lac after - Years

 

 

If one invested Rs. 1,00,000/-.then lets take a look at what it give after some years (based on some assumptions):

10 Merits of saving in a ELSS

  1. Income tax benefit under 80 C: Individuals are allowed to invest upto Rs. 1,00,000/- per financial year thus availing rebate deductible from their gross taxable income. On the other hand, there is no ceiling on how much you wish to invest but tax rebate would be limited only to Rs.1,00,000/- in a single financial year while any other mutual fund investments do not qualify for tax rebates.
  2. Least investment time horizon: with minimum 3 years lock in. With most of the other tax saving instruments like PPF, NSC and FD being debt instrument category, ELSS is investing 80-100 % in shares, thus bringing high risk high return in minimum possible time horizon, thus making it th3 shortest lock in  instrument in its tax saving category, but remember if in SIP mode, each amount invested every time get locked in for respective 3 years period.
  3. Easy liquidity: after the 3 years lock in, you can redeem your equity funds or you can also stay invested till you want to, rather do not have to close necessarily after 3 years thus giving you continued tax free returns  on your investments done earlier.
  4. Least investment amounts compared to ULIP or pension plans- with minimum of Rs. 500/- per month while most of the mutual fund require a minimum of Rs. 1000/- to Rs. 5000/- minimum investment.
  5. Earn dividends while your investments are still locked in for 3 years: the option to get dividends is available when investing. 3 type of returns are available: growth, dividend and dividend reinvestment option.
  6. Tax free maturity: both dividends and growth are tax free at maturity. Future returns are hence totally tax free in your hands. Even DTC provides tax exemption from  long term capital gains.
  7. Great opportunity to get flavours of Indian Equity market, especially for young or early investors who should taste equity when their long term goals are not within 3 years. Past 5 years past performance having given 16-19 % kind of returns
  8. Good ideas to start saving habit- start the habit with investing on a regular basis. For those looking at creating wealth creation over medium to long term, ELSS is perhaps the only  tax saving instrument which also is an inflation beating capacity.
  9. SIP: get the benefit of buying the high and the low of the markets thus kind of insulating your investments from perhaps buying when the market was high.
  10. Open ended funds: ELSS are open ended mutual funds which gives you the option to buy anytime.

10 Demerits of investing in ELSS

  1. Current income tax rebate may soon get waived off with the soon to start winter session perhaps going to pass the much awaited DTC (direct tax code) which would or may take off this rebate offer.
  2. If DTC gets passed, it may bring in Exempt, Exempt, Tax (EET) regime which means that the maturity of ELSS could get taxed or added to your income of that year of maturity bringing sudden demerits not planned by you earlier.
  3. Past performance is not to be taken as future returns. With last 3 years abysmal performance and the current volatile market conditions can be taken as investors disinterest today.
  4. Not for risk averse: avoid ELSS if you are not having appetite for risk and also if you are trying to invest for short term goals. ELSS is for those who understand market linked risk and are ready undertake the journey of high risk with high return concept.
  5. Not all funds may give positive returns when you investments turn 3 years old and hence some diversification may help.
  6. Not a great option if you thinking to link some specific future financial goals with ELSS maturity.
  7. Even though the lock in period for ELSS is 3 years, you have to be prepared for a 7-10 years to get the right flavour for equity market.
  8. Equity return are highly volatile and therefore may give even erode the basic capital (capital loss) in the short term.
  9. Premature withdrawal is not allowed before 3 years while other likewise tax saving instruments like PPF, NSC with some penalties, withdrawal is possible. This lock in of 3 yrs means that you cannot withdraw your 12th month SIP till 48th month while like wise investments like ULIPS allow you to get even the last 59th premium paid to be paid out to you on 60th month maturity.
  10. During certain market downturns, one may have to just continue while your investments may be getting you negative return.

CONCLUSION: CONSIDER ELSS  as part of your overall financial plan and not as ad hoc investments as necessarily done goal based investment would perhaps  help reach right conclusions.

IMPORTANT CONSIDERATION: In the final draft of the new tax code, no tax breaks have been provided in case you invest in future ELSS; perhaps, only retirement-oriented investments would be eligible, ELSS may change not be eligible as a "TAX SAVING" investment. It is to be seen that perhaps ELSS may lose tax-saving advantage in the current form of the DTC, if passed. Moreover, DTC provides tax exemption on long-term capital gains from equity funds. Therefore, the gains from investments, made before DTC (if and whenever passed) will remain eventually tax-free.

Disclaimer: Views expressed by Taresh Bhatia and or Advantage Financial Planners LLP are only for study purpose and not as investment advice. All investments  in ELSS are risky and hence consultation with a qualified financial professional like a CFP, CA or tax consultation along with investment advisor are highly recommended. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. ELSS and all Mutual funds are subject to market risks and no past performance should be taken as future performance in any way what so ever. The information transmitted in this blog/ website/ email contains confidential and privileged material and it is meant for the intended recipient only. If you are not the intended recipient of this email, please delete the same and inform the sender immediately. Any disclosure or further distribution of the email is strictly prohibited