Selecting investment ideas within the Sec 80c basket – ELSS - Equity Linked Saving Scheme
Usually taxpayers run from pillars to posts to find out how to save tax. It is similar to a Tamil saying "எந்த மருந்தைத் தின்றால் பித்தம் தெளியும்", meaning which medicine is the cure for the heat produced. All of us are exploring every possible way to save tax. The key over here is to check how efficient and how good the returns are. In the previous article, we have seen 3 options to save tax.
They are:
1) As per Income Tax Act, under Section 80c we can avail tax exemptions up to Rs1.5 Lakh
2) Investments under Rajiv Gandhi Equity Savings Scheme – exemptions up to Rs 50,000 for first time investors in stock market through direct investing or through mutual fund specified schemes under demat mode
3) By investing under National Pension Scheme NPS, we can get additional benefit of Rs 50,000 tax exemption under Section 80c
Among the various available options under Sec 80c, it is better to save tax by investing in equity linked saving schemes. In this article, we will learn more details about this equity linked savings schemes and why it is superior when compared with the other investment options.
Mutual funds
First, let us understand what Mutual Fund is. Mutual Funds are very similar to investing/trading in the markets (equity as well as debt). Most of us are not comfortable operating in markets directly, especially in equity market, because of the fear of losing our hard earned money. With Mutual Funds, we can let go of that worry, as the experts will invest in markets on behalf of us to get better returns. Mutual funds in India are well controlled and very transparent when compared to the other investment products. Mutual Funds are closely monitored by SEBI (Security Exchange Board of India). Currently in India, there are about 44 mutual fund asset management companies and around 838 mutual fund schemes. Out of this, around 40 schemes belongs to ELSS Plans, which is our major focus point in this article.
Compelling reasons to invest in ELSS
For example, let us take Sundar, who works in IT sector where his annual salary is around 4 lakhs and his monthly salary is around Rs 35,000. For him to save tax, he can plan and pay a sum of Rs 5,000 every month through SIP. He can fix his monthly contribution depending upon his requirements. In our case, during the financial year end, he can get tax exemption of around Rs 6,000 if he is in the 10% tax bracket. This is nothing but 5000 X 12 months = 60000 and 10% of 60000 is around 6000. So under ELSS, he can claim tax benefit of Rs 6,000 for his investment of Rs 60,000 in tax saving ELS schemes.
Advantages of investing in ELS schemes
In ELS scheme, we can withdraw investments made in the scheme after 3 years from the date of investment. There is no fixed maturity date in the case of open ended ELSS. We can withdraw the investments at any point in time after statutory lock-in of 3 years. if you need the money after 3 years, you are free to withdraw it. If you wish to continue, the money stands to be invested, allowing it to get compounded. You can withdraw when there is need from your end. The monthly contributions from our side is highly flexible and we can choose any amount like Rs 500 or Rs 5,000. It is upon us to contribute according to our capacity and requirements, there is no compulsion in this monthly payments.
The payment frequency is also very flexible and we can choose to pay every month through systematic investment plans (SIP) on a particular date convenient for us.
Alternatively, we can choose to pay in an ad hoc manner. For example, we can pay say Rs 15,000 on the first of May and then we can skip some payments. Later in October or in December when we get our Diwali/Annual bonus and we can pay Rs 30,000 in these ELS schemes. At the end of the financial year in March, we can pay the remaining Rs 15,000 to reach our target of Rs 60,000 in the financial year. Following this method also, we have paid a total of Rs 60,000, instead of Rs 5,000 every month. Based on our cash flow patterns, we can determine when we want to invest. In a nut shell, all the money invested in ELS scheme in a financial year, is eligible for tax exemption. Minimum payment in ELS scheme is kept very low at Rs 500, so that large sections of people can participate in the ELS schemes. Another advantage of investing in ELS schemes is, there is no upper limit for investment. We can invest any amount. Up to Rs 1.5 Lakh will be considered for Tax Exemption. Investments over Rs 1.5 Lakh will be available in the scheme and will generate return as per the scheme performance.
Conventional ELS Schemes
We may wonder what is happening to the money we're giving to the fund/AMC or where they are getting invested? Actually, the money we invest in ELS schemes are handled by specialist professional fund managers and they invest our money in equity markets. Hence, the returns will be dependent upon the market movements.
Retirement based ELS schemes
Another variation of mutual fund schemes which is available for tax exemptions is called retirement plans. These schemes also come under equity linked saving schemes but are generally called pension plans or retirement benefits plan. These plans are generally in balanced category, meaning our money will be invested in around 40 to 60% equity and the rest in debt category. We can withdraw the money only after we reach our retirement age. We cannot withdraw the money before retirement. This is the main difference between the Conventional ELS Schemes and Retirement based ELS schemes. We can choose suitable schemes depending upon our requirements and anticipating cash flows from the future.
From the last article, Tax Saving Part 1, we understand that ELS schemes have given better returns and are superior when compared to other popular tax saving schemes within Sec 80c investment bucket. Around 40 ELS schemes are available for us to invest. Given below is a table that provides good schemes for investment. Conventional ELS Schemes have a lock in period of 3 years and in Retirement based ELS schemes, the cash outflow from fund to the investor will only be after investor’s retirement.
Usually taxpayers run from pillars to posts to find out how to save tax. It is similar to a Tamil saying "எந்த மருந்தைத் தின்றால் பித்தம் தெளியும்", meaning which medicine is the cure for the heat produced. All of us are exploring every possible way to save tax. The key over here is to check how efficient and how good the returns are. In the previous article, we have seen 3 options to save tax.
They are:
1) As per Income Tax Act, under Section 80c we can avail tax exemptions up to Rs1.5 Lakh
2) Investments under Rajiv Gandhi Equity Savings Scheme – exemptions up to Rs 50,000 for first time investors in stock market through direct investing or through mutual fund specified schemes under demat mode
3) By investing under National Pension Scheme NPS, we can get additional benefit of Rs 50,000 tax exemption under Section 80c
Among the various available options under Sec 80c, it is better to save tax by investing in equity linked saving schemes. In this article, we will learn more details about this equity linked savings schemes and why it is superior when compared with the other investment options.
Mutual funds
First, let us understand what Mutual Fund is. Mutual Funds are very similar to investing/trading in the markets (equity as well as debt). Most of us are not comfortable operating in markets directly, especially in equity market, because of the fear of losing our hard earned money. With Mutual Funds, we can let go of that worry, as the experts will invest in markets on behalf of us to get better returns. Mutual funds in India are well controlled and very transparent when compared to the other investment products. Mutual Funds are closely monitored by SEBI (Security Exchange Board of India). Currently in India, there are about 44 mutual fund asset management companies and around 838 mutual fund schemes. Out of this, around 40 schemes belongs to ELSS Plans, which is our major focus point in this article.
Compelling reasons to invest in ELSS
For example, let us take Sundar, who works in IT sector where his annual salary is around 4 lakhs and his monthly salary is around Rs 35,000. For him to save tax, he can plan and pay a sum of Rs 5,000 every month through SIP. He can fix his monthly contribution depending upon his requirements. In our case, during the financial year end, he can get tax exemption of around Rs 6,000 if he is in the 10% tax bracket. This is nothing but 5000 X 12 months = 60000 and 10% of 60000 is around 6000. So under ELSS, he can claim tax benefit of Rs 6,000 for his investment of Rs 60,000 in tax saving ELS schemes.
Advantages of investing in ELS schemes
In ELS scheme, we can withdraw investments made in the scheme after 3 years from the date of investment. There is no fixed maturity date in the case of open ended ELSS. We can withdraw the investments at any point in time after statutory lock-in of 3 years. if you need the money after 3 years, you are free to withdraw it. If you wish to continue, the money stands to be invested, allowing it to get compounded. You can withdraw when there is need from your end. The monthly contributions from our side is highly flexible and we can choose any amount like Rs 500 or Rs 5,000. It is upon us to contribute according to our capacity and requirements, there is no compulsion in this monthly payments.
The payment frequency is also very flexible and we can choose to pay every month through systematic investment plans (SIP) on a particular date convenient for us.
Alternatively, we can choose to pay in an ad hoc manner. For example, we can pay say Rs 15,000 on the first of May and then we can skip some payments. Later in October or in December when we get our Diwali/Annual bonus and we can pay Rs 30,000 in these ELS schemes. At the end of the financial year in March, we can pay the remaining Rs 15,000 to reach our target of Rs 60,000 in the financial year. Following this method also, we have paid a total of Rs 60,000, instead of Rs 5,000 every month. Based on our cash flow patterns, we can determine when we want to invest. In a nut shell, all the money invested in ELS scheme in a financial year, is eligible for tax exemption. Minimum payment in ELS scheme is kept very low at Rs 500, so that large sections of people can participate in the ELS schemes. Another advantage of investing in ELS schemes is, there is no upper limit for investment. We can invest any amount. Up to Rs 1.5 Lakh will be considered for Tax Exemption. Investments over Rs 1.5 Lakh will be available in the scheme and will generate return as per the scheme performance.
Conventional ELS Schemes
We may wonder what is happening to the money we're giving to the fund/AMC or where they are getting invested? Actually, the money we invest in ELS schemes are handled by specialist professional fund managers and they invest our money in equity markets. Hence, the returns will be dependent upon the market movements.
Retirement based ELS schemes
Another variation of mutual fund schemes which is available for tax exemptions is called retirement plans. These schemes also come under equity linked saving schemes but are generally called pension plans or retirement benefits plan. These plans are generally in balanced category, meaning our money will be invested in around 40 to 60% equity and the rest in debt category. We can withdraw the money only after we reach our retirement age. We cannot withdraw the money before retirement. This is the main difference between the Conventional ELS Schemes and Retirement based ELS schemes. We can choose suitable schemes depending upon our requirements and anticipating cash flows from the future.
From the last article, Tax Saving Part 1, we understand that ELS schemes have given better returns and are superior when compared to other popular tax saving schemes within Sec 80c investment bucket. Around 40 ELS schemes are available for us to invest. Given below is a table that provides good schemes for investment. Conventional ELS Schemes have a lock in period of 3 years and in Retirement based ELS schemes, the cash outflow from fund to the investor will only be after investor’s retirement.
Top Rated Tax
Planning Funds return % as on October 16, 2016 - Data from value research
online - Conventional ELSS Schemes
|
|||||||
Fund
|
Rating
|
Launch
|
3-Years
|
5-Years
|
10-Years
|
Expense Ratio
|
Net Assets (Cr)
|
Axis Long Term
Equity Fund
|
5
|
Dec-09
|
28.62
|
21.98
|
-
|
1.98
|
10,465
|
Birla Sun Life Tax
Plan
|
4
|
Feb-99
|
26.04
|
18.98
|
11.48
|
3.01
|
408
|
Birla Sun Life Tax
Relief 96
|
4
|
Mar-96
|
27.09
|
19.51
|
12.57
|
2.41
|
2,459
|
DSP BlackRock Tax
Saver Fund
|
4
|
Jan-07
|
26.69
|
20.6
|
-
|
2.61
|
1,436
|
Franklin India
Taxshield Fund
|
4
|
Apr-99
|
25.18
|
18.1
|
14.38
|
2.4
|
2,391
|
ICICI Prudential
Long Term Equity Fund (Tax Saving)
|
4
|
Aug-99
|
24.66
|
18.34
|
12.76
|
2.3
|
3,596
|
IDBI Equity
Advantage Fund - Regular Plan
|
5
|
Sep-13
|
30.23
|
-
|
-
|
2.79
|
548
|
Invesco India Tax
Plan
|
4
|
Dec-06
|
25.58
|
18.45
|
-
|
2.49
|
331
|
Principal Tax
Savings Fund
|
4
|
Mar-96
|
24.82
|
20.03
|
10.36
|
2.55
|
287
|
Tata India Tax
Savings Fund
|
4
|
Mar-96
|
25.47
|
18.91
|
12.88
|
2.92
|
419
|
Top Rated Tax
Planning Retirement/Pension Funds return % as on October 16, 2016 - Data from
value research online
|
|||||
Fund
|
Rating
|
1-Year Return
|
3-Year Return
|
5-Year Return
|
10-Year Return
|
Franklin India
Pension Fund
|
4
|
11.14
|
17.28
|
13.51
|
10.35
|
UTI Retirement
Benefit Pension Fund
|
2
|
11.29
|
14.05
|
11.3
|
9.37
|
Those who wish to know more about tax saving Mutual Funds can follow the links provided below.
Latest updated NAV/return details of ELSS funds can be viewed here in money control or in value research as given below
https://www.valueresearchonline.com/funds/fundSelector/default.asp?cat=18&exc=susp%2Cdir%2Cclose
Article in ET, on how SIP is better than investing lumpsum in ELSS, dated Feb 15, 2016
Be holistic in your tax planning from morning star dated 22-02-16
How to pick a tax-saving fund from morning star dated 23-02-16
Should you invest in PPF or ELSS? Morning star dated 25-02-16
Series of articles from value research
Saving tax through Mutual Funds - article from value research
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