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8
Jun

Saving Taxes with Mutual Funds

The financial year 2018-19 has just started and accordingly, the agenda of tax saving might not be on your priority list right now. The general tendency is to check the tax saving options only neat the financial year end, but sooner you start, more comfortable you get with your tax savings as regular savings take off much of a load from your pocket. The traditional investment avenues like Public Provident Fund (PPF), Life Insurance Premium, National Savings Certificates (NSC), 5-year tax saver FDs etc. have been the preferred options. However, even Mutual funds can help you save taxes and considering the lock-in period along with the potential for higher returns, Equity Linked Savings Schemes (ELSS) emerge as a reasonably better choice.

 

What is ELSS?

ELSS refers to the specified class of equity oriented mutual funds which are eligible for tax deduction under Section 80C of the Income Tax Act. Being an equity oriented fund, it needs to invest more than 65% of the portfolio in equity and equity related instruments. For purpose of being eligible for tax deduction, such mutual fund schemes come coupled with a lock-in period of 3 years. As per the ceiling limit prescribed under the Income Tax Act, one can avail maximum tax deduction up to Rs. 1.50 lakhs for an investment of equal amount under such schemes. While one is free to invest a higher amount, it will however not enjoy any tax benefit but still subject to the lock-in period.

 

 

Advantages of ELSS

Here are the benefits you get by taking a step towards tax savings with ELSS:

  1. Lowest Lock-in Period - ELSS comes with the lowest lock-in period of three years as compared to other eligible avenues for tax saving where the lock-in period ranges from 5 years to 21 years.
  2. Flexibility to Invest Periodically – For investing in ELSS,one enjoys the flexibility to invest through Systematic Investment Plans (SIPs) or even invest in one go.
  3. Taking away the Choice of Redeeming your Investments – Due to 3 years’ lock-in period, the investor does not have a choice to redeem the investment at an early stage due to the market trend. This helps him stay invested and thereby helping accumulate wealth over a longer term.
  4. The potential for Higher Returns – While most of the tax saving avenues under Section 80C offer guaranteed returns, ELSS provide you with a potential for higher market-linked returns. As per the historical returns, ELSS category of funds has given average returns of 14.8% and the best fund giving returns of up to 35.0% during the last one year.
  5. Preferential Taxation – Since an investor needs to stay invested mandatorily for a minimum period of 3 years, gains arising from the redemption of ELSS will always be long term. As per the present tax laws, an investor needs to pay tax @ 10% on the long-term capital gains on equity oriented mutual funds, as against the maximum marginal rate of 30% (plus applicable surcharge and cess). Further, an investor is also entitled to an exemption of Rs. 1 lakh a year for such gains.

 

Given the host of benefits offered by ELSS, you should consider investing in these schemes in your tax saving plans while also allowing wealth creation for you.

 

Edelweiss Partners offers you an online mutual fund platform that offers a comprehensive bouquet of Mutual Fund schemes across categories and fund houses. It also provides access to the online transaction platform, research reports, expert analysis, fund recommendations, and financial planning tools.

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