Tax planning/saving is one of the most important aspects of financial planning that every investor must take into account for building a strong portfolio. When one walks into a store, he/she expects to buy the best item of their choice, at the most affordable price, isn’t it? Similarly, when it comes to saving of taxes, investors are presented with a range of options in the market – such as PPF, traditional life insurance policies, NSC and more. Today, we will be talking, in depth about one such option – ELSS or Equity Linked Savings Schemes.

ELSS funds are tax saving mutual Funds that new or existing investors can use to claim a tax deduction of upto Rs 1.5 Lakhs in a financial year from their taxable income as per the Income Tax Act, 1961. Investor can invest in ELSS funds online provided they are mutual fund KYC compliant.

In comparison to other tax saving investment options in the market, ELSS offers superior returns, helps to invest in stocks without taking direct risk and also generate long term wealth. Further, it offers the shortest lock in period of 3 years and if continued with patience, it can help investors reach several desired financial goals. Let us see how-

Comparison with other tax saving options

PPF has a lock in period of 15 years. If one wants to withdraw money prior to that, it is possible from the fifth year but only partially.

Traditional life insurance policies have lock in periods of 15-25 years typically. It varies depending on the type of policy you choose. If premature withdrawal is needed, surrender charges will be applicable.

ULIPs have a lock in period of 5 years. In case of early withdrawal, the fund balance would be moved to a discounted policy Fund. The insurer will charge a fund management fee and provide a minimum guaranteed life cover in this case.

NSC and tax saving fixed deposits with banks have 5 years lock in period and premature withdrawing of money is strictly not allowed.

Thus, it is clear from the above examples that, ELSS has the shortest lock-in period, after which an investor is free to withdraw the money through online mutual fund facility provided by the respective AMCs or remain invested for the purpose of capital appreciation.

ELSS Taxation
Let us now understand the taxation for ELSS funds. Investments made in ELSS offer tax break under section 80C. Post the lock-in period, any redemption or switch-out made from the ELSS will attract long term capital tax. According to the current taxation, equity or equity oriented funds held for more than 365 days (1 year) attracts long-term capital gains tax. However, these gains are taxable at the rate of 10%, if the gains is in excess of Rs 1 lakh in a financial year. Gains less than Rs 1 lakh are tax free.

Given the advantages of ELSS funds as compared to other tax saving instruments, one can go for the online mutual fund option here - wherein the process of selecting the fund, its AMC, investment tenure, payment and tracking of the performance can be done online entirely. This makes the process of ELSS investment a time saving one, coupled with efficiency and convenience for the customers.

ELSS Funds are a great choice for investors when they are looking for dual option of saving taxes as well as grow their wealth in the long term. You can consult a financial advisor, who can explain ELSS better.

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