In the months of January, February and March, most people – whether salaried or professionals - have only one thing on their mind… “income tax”. Everyone is thinking about saving the maximum tax. According to the Government of India, you can save tax under various sections, some of which are Sections 80C, 80D, and 80EE. You can claim tax deductions up to Rs. 1.5 lakh under Section 80C. Usually, when we think about tax saving, we generally consider conventional tax-saving plans such as PPF, Insurance, ULIP and so forth.
Besides traditional investment options, one may consider investing in equity as an asset class with ELSS (Equity Linked Savings Scheme), an equity mutual fund with a 3-year lock-in period. Investment in ELSS allows you to claim a deduction from your income. You can avail up to Rs. 1.5 lakhs deduction a year by investing in ELSS, covered under Section 80C of the Income Tax Act, 1961. Although you can invest more than Rs. 1.5 lakhs, but the excess will not qualify you for the deduction as per Section 80C.
Let's see the key features of ELSS tax-saving mutual funds.
Income Distribution Cum Capital Withdrawal (Dividend) and Growth Options:
The investor can choose either the income distribution cum capital withdrawal (dividend) or the growth option, wherever available under their Equity Linked Savings Scheme. While the income distribution cum capital withdrawal option is available, it may be better to choose the growth option.
Here are some advantages of ELSS mutual funds
Tax Savings:
The deduction available on the amount invested in an ELSS tax-saving mutual fund is up to the limit of Rs. 150,000 under section 80C of the Income Tax Act.
Lower lock-in period compared to other tax-saving options:
A lock-in period is a mandatory time period for which you cannot sell or withdraw the invested amount. ELSS tax-saving mutual funds have a lock-in period of only 3 years, while in the case of other traditional tax-saving options minimum lock-in period is more than 3 years.
Lower tax on gains:
An ELSS fund is invested for a minimum period of 3 years. Any gains from the sale of ELSS funds are, therefore, long-term. According to the current law, profits above Rs. 1,00,000 shall be taxable at 10%. In contrast, short-term capital gains are taxed at 15%.
Redemption not compulsory after 3 years:
The investors can continue with the respective ELSS fund if they are satisfied with the returns. Redemption is not mandatory after a period of 3 years. It is only a minimum investment duration. However, there is no maximum investment duration.
Probable Wealth Creation
Equities may offer higher returns over the long term. However, they are also associated with a very high risk. Usually, wealth creation may require a long-term time horizon. This period may be suitable for an equity-oriented investment to aim to overcome short-term market volatility. Furthermore, you may invest in an ELSS either by way of a lumpsum amount or systematically through an SIP.
Investing in too many funds:
To save tax, many investors tend to invest in a new Tax Saving Fund every year. This makes it difficult to handle and monitor the portfolio. So, it is advisable to invest in one or limited/few ELSS funds only, as per one's needs & goals.
Not considering the risk level:
Any scheme comes with its own set of risks. Therefore, you should always base your investments on your financial goals and investment. This way you may not get stuck in any financial problems.
After carefully evaluating all your options, you may start your investment journey with mutual funds for tax savings with an aim of realistic financial goal roadmaps.
Disclaimer: The views expressed in this article are personal in nature and are in no way trying to predict the markets or to time them. The views expressed are for information purposes only and do not construe to be any investment, legal, or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. The view expressed are based on the current market scenario and the same is subject to change. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
