[In this post I have discussed the ELSS Tax Benefits. I have told the rules of ELSS (tax saving mutual fund). I have also compared the ELSS with other tax saving investments]
As your income increases, the need of Tax Saving also increase. Higher the income greater the income tax rate. But, we do not want to give away our hard earned money in the taxes. Every one of us wants to minimise the income tax.
Fortunately, The government has given us legal way to cut the taxes. There is a wide spectrum of investments which can be claimed for the tax benefit. The Equity Linked Saving scheme i. e. ELSS is one such investment plan which gives you the tax benefit.
Most of the investments including ELSS, which gives us the benefit of tax deduction comes under the section 80C of the income tax Act. The investments specified under this section are eligible for tax deduction. It means the amount, you have invested in these specified investments can be used to reduce your total taxable income. If your income of Rs X is eligible for tax and you have invested Rs Y on the tax saving investments, your total taxable income would become X-Y.
However, you can’t claim more than Rs 1.5 lac under section 80C. Your taxable income can’t reduce more than Rs 1.5 lac because of the tax saving investments.
So, there is an upper limit on tax benefits. Along with this, there are other conditions as well. These conditions vary for every type of investments. This makes some tax saving investments better than the others. The Equity Linked Saving Scheme has got the favourable condition, which make it a better tax saving investment.
Tax Saving Through ELSS
The investment in ELSS is eligible for tax deduction under section 80C. You can get ELSS tax benefit up to Rs 1.5 lac. This investment of Rs 1.5 lac can save tax up to Rs 46,350. This tax saving of Rs 46,350 is for those who are in the 30% income tax bracket. For 20% income tax slab it is Rs 30,900 and For 10% slab it is 15,450.
What do yo think? ELSS is profitable or not? Let us understand the rules related to the ELSS Tax Benefit.
Lock In Period of ELSS
The government gives tax benefit on many investments, but all these tax benefits come with a lock in period. You can’t pull out your investment before a certain period. For ELSS, This lock in period is 3 years.
Is it a long duration?
Well, let me tell you that it is the shortest lock-in period among all the tax saving investments.
Lock In Period of ELSS SIP
Systematic Investment Plan (SIP) is a method of investing. The regular investment of fixed amount is called as SIP. You can also invest in ELSS through the SIP method.
But, investment through the SIP creates a confusion. What would be the lock-in period of the ELSS SIP? Would it be the three years from the beginning date of SIP? Or would it be 3 years from the End date of SIP?
This confusion arises due to the lock in rules of EPF, PPF and Recurring deposit. In the EPF, PPF and RD the lock in is counted from the start of contribution.
But, in the ELSS, Every contribution has its own lock-in period. It has no relation with the start date of SIP. It means the last SIP contribution would remain locked for another three years. I have given below an illustration of a 6 month SIP.
Investment of ELSS
Oh no! I did not tell you the basic feature of equity linked saving scheme. I was just focused on the ELSS tax benefits.
Indeed, an Equity linked saving schemes is a type of equity mutual fund which gives you tax benefit. EQUITY mutual funds are those mutual funds which invests in the shares of the companies. Thus ELSS invests into the share market.
It is like any other equity mutual fund but with the lock in period. There are some more small differences. It is given below.
Minimum and Maximum Amount Limit
There, is a minimum amount limit of every investment. All the mutual fund schemes have set this limit. They are free to set the minimum amount limit. But, the ELSS scheme don’t have such liberty.
Rather, The government has fixed minimum amount of Rs 500, for the investment into the ELSS. There are mutual fund houses which have set minimum amount of Rs 5000 for all the mutual fund schemes except the ELSS.
What is the Maximum Limit?
Chill! There is no such limit. You can invest into the ELSS as much as you want. But, tax benefit is restricted to the limit of section 80C. It is Rs 1.5 lac for all the investment under section 80C.
Tax Free Redemption
For an investment, there can be tax benefit on 3 occasions.
- Tax deduction at the time of investment
- Tax Exemption on periodic interest
- Tax Exemption on Maturity Amount
Were you aware of this?
If you investment gets the tax exemption on all the three occasions, It would be EEE (Exempt, exempt, exempt) category of tax exemption. ELSS fall in this category.
Of course! there are tax saving investments where only initial investment amount gives tax benefit. The interest income becomed taxable. For example NSC and tax saving FD.
There are investments, where the maturity amount becomes taxable, Such as pension plans.
But, In the case of the ELSS, you can relax during redemption. It is not because the government has made any special provision for the ELSS. Rather, It is because of the zero long term capital gains tax.
The investment in shares becomes taxfree after one year. You don’t need to pay any tax on the profit from shares if it was kept for one year or more.
The ELSS is locked for 3 years, Thus it automatically comes under zero long term capital gains tax category.
ELSS Vs Other Tax Saving Investments
I have told you that ELSS has the lowest lock in period and It gives all round tax benefit. But, whether everything is good with the ELSS. Let us compare the equity linked saving scheme with other tax saving investment. I will take the parameters one by one
For any investment the return is the primary objective. The tax saving investment should also give good return along with tax deduction.
|PPF||It gives the return comparable to the bank fixed deposit. It is 8.1% at the time of writing this post. Compounded Yearly.|
|NSC||It gives fixed interest for the five years. It is 8.1% now. compounded half yearly.|
|Tax Saving FD||It also give fixed interest rate for five years. It would be almost same as the NSC and PPF. Compounded Quarterly|
|ELSS||It does not give fixed interest rate. Rather, your investment grows. The return is not guaranteed. It can be very high as well as the negative return.|
Lock In Period
Everyone want his money always available to him so that he can use it when required. But tax saving investment comes with lock in period.
|PPF||The PPF account matures in 15 years. The money is locked till the maturity. However, you can take loan or partially withdraw the amount if required|
|NSC||The money gets locked for at least 5 years.|
|Tax Saving FD||It also has the lock in period of 5 years|
|ELSS||It has lowest lock in period of 3 years.|
Everyone want to save tax but very few of us want to put our money at risk. Thus it is necessary to understand the risk factor.
|PPF||It is a safe investment. The government of India keeps your money and gives interest rate according to market rate|
|NSC||It is also a government scheme. The interest rate is linked to Government bond.|
|Tax Saving FD||The banks keep the deposit. Banks deposits are secure. The interest rate are fixed according to market condition|
|ELSS||The money is invested in shares. It usually gives good return in the long term (more than 10 years). But, In the short term you may loose the money.|
All the discussed tax saving investments give tax deduction under section 80C but earning and maturity amount have different rules.
|PPF||Every contribution to the PPF account is eligible for tax deduction. The interest earning and maturity amount is also exempted from tax.|
|NSC||The investment enjoys 80C benefit. But, earned interest is taxable. The redemption of original amount is tax free.|
|Tax Saving FD||It is similar to NSC. Only interest part is taxable.|
|ELSS||There is no tax on earning and redemption. The investment is already eligible for tax deduction.|
Limits on Investment
|PPF||Minimum Investment Rs 500/year, Maximum Investment – 1.5 lacs/year|
|NSC||Minimum Investment – Rs 100, Maximum Investment – No Limit|
|Tax Saving FD||Minimum Investment – Rs 500, Maximum Investment – No Limit|
|ELSS||Minimum Investment – Rs 500, Max Investment – No Limit|
Overall, ELSS is a good tax saving investment. But, one should not invest into it heavily as the return is dependent upon share market swings. There should be a balance between fixed return investment and tax saving mutual funds.
If you find ELSS useful for you, you must check out the Best ELSS for 2017.