Financial planning and tax planning are two different sides of the same coin. Without proper financial planning, you will not know how to save your money in taxes. And if you fail to invest in a lucrative tax saving scheme, you are lacking in financial planning. Traditionally, whenever people look at an investment scheme, they not only try to find out the potential returns that this scheme can generate but are also keen on knowing the tax benefits that it offers.
What if we tell you that you can invest in the stock market and get a tax benefit by investing in a single investment scheme?
Equity Linked Savings Scheme (ELSS) is an equity mutual fund scheme that offers the dual benefit of long term capital appreciation and tax exemption. Here are a few reasons why this tax season you should divert your attention towards ELSS. As per Section 80C of the Indian Income Tax Act, 1961 a taxpaying citizen can invest up to Rs 1.5 Lacs every fiscal year in ELSS funds and claim tax exemption on the sum invested.
It has the shortest lock-in period
ELSS is a tax saving scheme that comes with a predetermined lock-in period of three years. This means that once you invest your money in ELSS you cannot withdraw that sum for the next 36 months. However, ELSS has the shortest lock-in period if you compare it to other tax saving instruments like Public Provident Fund, and bank FDs that have lengthier lock-ins.
ELSS offers tax benefit
Here’s an example of how ELSS can help you save tax –
If you are earning Rs 10.5 Lac, you fall in the highest tax bracket. If you invest Rs 1.5 Lac in ELSS you can bring down your tax liability and your gross taxable income will be Rs. 9 Lac post tax exemption. Also, as long you remain invested you increase your chances of earning some decent returns.
ELSS offers flexible investing through SIP
Another reason why investors should consider ELSS over other tax-saving instruments is that it offers the option of SIP. A Systematic Investment Plan (SIP) is a simple and effective way to invest and save tax in a disciplined way. Investors get the liberty to choose the monthly investment sum of their choice. If they automate SIP transactions, every month this sum is debited from their savings account, and they can buy fund units in quantum with the current NAV. They can even start with an investment sum as low as Rs 500 every month. The biggest plus of investing in ELSS via SIP is that investors can start or stop or even modify the investment sum at any given time. They do not have to pay any penalty for doing so.
Outperforming every other tax saving tool
Historically, ELSS has outperformed every other tax saving investment tool in the long run. While conservative tax schemes can offer up to 8% returns, ELSS has generated an average of 12% and sometimes even up to 15% returns.
ELSS is not just a tax saving scheme, it’s a wealth creation tool. If you are patient with your investments, do not redeem your investments fearing market volatility, and keep a long term investment horizon then you might be able to accumulate a wealthy corpus. However, investors must understand that ELSS is an equity oriented scheme that does not guarantee capital appreciation. Returns are always subject to market risk. However, investing for the long term does not only mitigate investment risk but can also bring in the power of compounding effect which is great for wealth creation.