Why ELSS Scores Over Other Tax-Saving Products?

 

Planning your taxes is an integral part of your financial planning. It may be short-term, medium-term or long-term.

Sec 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain investments. One of the most popular Sec 80C investments is in tax saving mutual funds or Equity Linked Savings Scheme (ELSS).

Among the host of tax saving products, equity-linked savings scheme alone may help you earn inflation-beating return.

The tax-saving season is upon once again. A whole host of financial products are competing with one another to seek you attention. One such product that is competing for your attention – Equity Linked Savings Scheme.

Equity-Linked Saving Schemes, or ELSS, are open-ended (funds that have no restriction on number of shares issued) and diversified (a way of allocating capital in a variety of assets in a way that reduces exposure to risk thereby mitigating loss) schemes offered through mutual funds.

Section 80C Options

However, thanks to the large number of products available under Section 80C, you need to evaluate your options carefully before investing your money in a particular scheme. On the debt side, you have tax saving instruments such as Senior Citizen Scheme, Sukanya Samridhi Account, Public Provident Fund, National Savings Certificate, Post Office Time Deposit – 5 years, Tax Saving Bank Fixed Deposit, Employee Provident Fund. However , these schemes have been offering low return. If you consider impact of inflation on these returns, it would be negative real return.

On the Equity side, you have ELSS, NPS and Unit-Linked Insurance Plans (ULIPs).

As per my opinion “ULIPs come with a high lock in period of five years and higher charges (Premium Allocation Charges, Policy Administration Charges, Fund Management Charges & Mortality Charges), and hence mutual funds serve as a better option to invest in equities that generates inflation-beating returns.”

Three years lock-in is another positive. Other options like NSC come with a five-years lock-in where as ULIP blocks your money for five years. NPS blocks your money till you retirement and PPF is a rather long 15 years lock-in.

For illustrative purpose:-

I have calculated annualized return (CAGR) for some of ELSS mutual funds to give you all some ideas about ELSS mutual funds past return. Please go thru below table to know the annualized return. In Indian mutual fund market, some other ELSS funds have completed 10 years but I have taken some funds to just know about the annualized return in mutual fund schemes.

ELSS Detail:

∼Under Section 80C you can invest Rs. 1,50,000/- in ELSS.

∼Investing in ELSS schemes through SIP route will help you tide over market volatility.

∼ELSS Scheme have the lowest lock-in of three years.

∼Choose your ELSS Scheme carefully, as a lot of schemes have a small and mid-cap bias

∼ELSS invests in equity, they carry an inherent risk. Compared to this PPF, NSC and tax-saving bank fixed deposits offer you fixed rates of return.

If you are willing to take a five-to-ten years view, it makes a lot of sense to look at ELSS as there are options that have beaten the PPF by a comfortable margin.

[blockquote style=”1″]“In this world nothing can be said to be certain, except death and taxes.” -Benjamin Franklin[/blockquote]

As per my opinion “There is no harm in using ELSS, as long as your tax plan is in syn with your overall financial plan.”

Happy Tax Planning!

Disclaimer: Kindly note that the above illustration is based on past performance. Mutual fund investments are subject to market risks. read all scheme related documents  carefully. Past performance may or may not be repeated in future. The products do not offer any guaranteed or assured returns whatsoever.

 

I am a CERTIFIED FINANCIAL PLANNERCM. For the moment, I have shared my experience growing up with you because it had a tremendous impact on how I do what I do.

If you have a question about your own financial situation please connect with me.  I’d be delighted to try to be of service.

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