Why ELSS is the best way to save tax in India? |
Posted: December 16, 2019 |
Benjamin Franklin had said that there are only two certainties in life – Death and Taxes. While we still cannot do anything about the former, we have something to take care of our tax obligations. And the cherry on the cake is that it also leads to wealth creation in the long run. It is nothing else but ELSS or Equity Linked Savings Scheme. These Mutual Funds are eligible for tax deduction under Section 80C of the Income Tax Act. But what is it that makes them a great tax saving instrument? Read on to know the reasons (one for each day of the week) to opt for ELSS to save on your taxes.
ELSS Funds invest in equity or equity-oriented schemes. These schemes have the potential to generate higher returns (read double digits) in the long run. On the other hand, other tax-saving instruments which are government-backed programs, offer only modest returns (range of 7%-8%) to the investors.
ELSS has a lock-in period of only three years. Other tax-saving instruments have a much longer holding period as shown in the table below:
The shorter lock-in period gives higher liquidity to ELSS investors.
ELSS is the perfect stepping stone for introduction to the world of the stock market. It helps novice investors take baby steps and get acclimatized to the workings of the market. The compulsory three-year lock-in period enables investors (especially new ones) to get used to the volatility witnessed with equity investments. Without that many investors might panic in a bearish market and sell off their investments. Once they witness an upswing and see their investments recuperate, they gain back their confidence. Many ELSS investors graduate to more complex or riskier investments later and create wealth in the long-term.
Tax saving instruments such as PPF, Bank deposits, NSC come with a prefixed maturity date. On the other hand, ELSS does not have a maturity period. You can continue to invest in ELSS for as many years as you wish. This flexibility helps to align the ELSS investment with a specific financial goal.
You do not need a huge sum of money to start off your ELSS investments. SIP allows you to invest on a periodical basis. This not only helps to instil a sense of financial discipline but also makes ELSS more accessible to the masses.
Amongst all tax-saving alternatives, ELSS offers the best value in terms of cash outflows. For example, with tax-saving Bank FDs, the interest earned is added to the investor’s gross income. The tax is then calculated basis the applicable income tax slabs. However, in the case of ELSS Funds, returns (LTCG) till the value of Rs. One Lakh does not attract any income tax. Any returns in excess of that limit are taxed at 10%.
There are many ELSS Funds available in the Indian market. All of them have a diverse portfolio and cater to different investor needs. This variety allows the investors to opt for a scheme that is in sync with their financial goals and risk profile. In short, there is something for everyone. Final Words ELSS investments are a great way to bring down your tax outflows and grow your corpus in the long run. So, before you finalize your tax planning, do give some serious consideration to these tax-saving mutual funds. You will surely not be disappointed. And if you are wondering about the best ELSS mutual funds, you can just visithttps://www.etmoney.com/mutual-funds!
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