Since time bygones, taxes have been often portrayed like a sword that is hanging on our very heads. But then, if we delve deeper on how the taxes provide for nation-building, paying taxes is one of the primary duties of citizens, some do it gladly while other do so grudgingly.
The truth is that many people get daunted by taxation because of the limited understanding of the domain. People make a series of investments into financial instruments in their zeal to save on taxes. But, what if there was a way in which saving on taxes would also be a smart way of building a corpus? Is there such a financial instrument that lets one save taxes and earn profits?
There is indeed one such avenue and it is called Equity-Linked Saving Schemes (ELSS). Basically, an ELSS is a diversified equity mutual fund wherein a majority of the corpus is invested in the stock markets.
According to norms, investment up to Rs. 1.5 lakhs in ELSS is eligible for deduction from taxable income under Sec 80C of the Income tax Act, 1961. This deduction is not selective and is available to all, irrespective of the tax brackets of individual and HUF investor. Even so, investors are advised to consult their tax advisor in view of individual nature of tax benefits.
All ELSS schemes have a lock-in period of 3 years (from the date of investment) and it is eligible for long term capital gains taxability. This means if you start a Systematic Investment Plan (SIP) in an ELSS, then each of your investments will be locked in for three years from the respective investment date. After a period of three years, Investors can exit ELSS by selling it.
Considering the fact that equities are known to give relatively better returns on investment over a longer period of time. Take for instance, the average annual returns from investment in a bank tax saving term deposit is around 6%# with a lock-in period of 5 years, the returns are taxable as per your tax bracket unlike in case of ELSS i.e. taxable @10%. As per Crisil Research, ELSS funds (represented by the CRISIL – AMFI ELSS Fund Performance index) returned 13.1% p.a., over the 3 year period. (As per the latest available data on Dec 29, 2017) Source: #Leading Bank
This idea of Mutual Fund day has been conceptualised by Reliance Mutual Fund as an Investor Education Initiative.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.