Invest in ELSS to save Income Tax

Financial experts say that it is better to plan tax-savings early and choose ELSS MF schemes and set his/her financial goals accordingly.

A large majority of taxpayers think about tax-saving instruments only weeks before the deadline. In some cases, they buy insurance plans, invest in Fixed Deposits or National Savings Certificates (NSC), and hardly think of mutual fund schemes as one of the options.

While the deadline for tax-saving investments is March 31 of every year, this year it was extended till June 30, 2020.

Apart from flexibility and liquidity, ELSS (Equity Linked Savings Scheme) mutual fund schemes provide better returns. ELSS, PPF (Public Provident Fund), NSC, FD and Life Insurance Premium come under Section 80 C of the Income Tax Act, where one can claim deductions of ₹1.50 lakh.

This is the right time to plan your tax-saving investments so that you can stay relaxed instead of postponing it till the deadline. While the deadline for tax-saving investments is March 31 of every year, this year it was extended till June 30, 2020.

Financial experts say that it is better to plan tax-savings early and choose ELSS MF schemes and set his/her financial goals accordingly.

IT employee Saranya Balachandran says that she used to plan tax savings only when the employer asks for investment proofs. “A few years after I joined my work, everyone told me that I can take insurance policies to save taxes. I immediately purchased many policies as I can claim deductions up to ₹1.5 lakh, but only later did I realize that there are other options available and that one should discuss with financial advisors first,” she adds.

Like her, many taxpayers make last-minute plans and hardly think of other investment instruments.

Since one has to make tax-saving investments before March 31 of every year, only during the last three or four months, typically between December and March, ELSS inflows are higher.

“ELSS comes with a lock-in period of three years. If a new investor wants to invest savings into stock market, ELSS would be an ideal choice because of its lock-in period which may adjust the market volatility,” says Zebu Share and Wealth Management Founder and CEO V Vijayakumar.

ELSS scheme is suitable for investors who are seeking long-term capital growth. In the past 10 years, CRISIL-AMFI (Association of Mutual Funds in India) ELSS Fund Performance Index outperformed CNX500 and PPF rate. According to AMFI data, net ELSS inflows between December 2019 and March 2020 was ₹3,834 crore. As the deadline for making investments was extended till June this year, financial experts believe that the actual inflows maybe more than this figure.

Also, instead of planning ELSS investments only in the last few months of the financial year, one can start planning right from the beginning of the fiscal. There is always a high level of transparency as investors know exactly how their funds are performing.

“If a market is in adverse condition, one might hesitate to invest in stocks, but through this asset class, one can get stock market investment benefits,” says Vijayakumar.

ELSS, a good option for tax saving purpose

As an investment option, and from the taxpayer’s perspective, ELSS scores very high across all categories available at present in the current market. Whatever you invest as tax savings, will come with a lock-in period, say minimum 3 years to maximum15 years (in the case of PPF), says Delhi-based financial planner Surya Bhatia.

“You can pick asset class based on your risk profile. Any investment in equity as an asset class carries an element of risk due to volatility. Subject to your risk profiling, ELSS, as an investment option, carries huge score. With minimum 3-year lock-in period, one can also end up holding for longer period if the particular scheme that you have invested does well,” says Promoter of Asset Managers Surya Bhatia.

As an asset class, Bhatia believes that ELSS offers you all and returns can be higher than 5-year bank FDs or NSC or your insurance policy. He adds that PPF is second in line after ELSS from a tax saving perspective.

“Go with a mindset of beating your existing investment which you would have done otherwise, and overall above that you will be getting 2% extra. I believe it will give double-digit return in long-term,” opines financial planner Bhatia.

Also, a 10% of LTCG (Long Term Capital Gains) tax is applicable, if the total gains exceed ₹1 lakh. For instance, if one earns ₹1.5 lakh, then the person has to pay 10% of ₹50,000 which comes to ₹5,000.

SIP or Lump sum investment?

If people wish to start saving, then they should adopt their savings pattern according to their earning pattern. For instance, salaried people earn their income monthly so their saving pattern should be monthly.

“Personally, I believe that if they invest savings according to their income pattern, rather than lump sum investments, especially in equity linked scheme, it will give the benefit of market volatility,” says financial expert Vijayakumar.

It is always preferable to take the SIP route. One can do rupee cost averaging and tide over possibility which any risk-free asset class will offer you. But, if anyone wants to do it in the month of December or January, it would be better if you stagger the purchase over the next 3-4 months. Put into a debt, and spread money over 4 months till March 31. Also, start simultaneously for the next year. Make a plan to take the SIP route, starting April of the next year, suggests Bhatia.

Key takeaways

1) ELSS comes with a lock-in period of 3 years and it is the best instrument that comes under tax saving category

2) It gives you decent or moderate returns and the total gains exceeding ₹1 lakh are taxable at 10%

3) It is better to take the SIP route than making lumpsum investments

This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.