ELSS funds are the best way to save on taxes, here’s why
Of all the 80C options available, ELSS mutual funds will give you the best payoff
Its a new year and another tax season looms large over the horizon. At Minance, we will soon be reviewing partner accounts for tax saving opportunities.
Minance uses some fairly advanced tax saving techniques such as Tax Loss Harvesting or forming a HUF for our partners but we often see that significant sums can be saved by simply taking advantage of the all the concessions that the tax code presents us.
One of the largest sources of deductions are those allowed under Section 80C.
Section 80C allows you to claim deductions of up to Rs. 1,50,000 for money spent on your child’s education, loan repayments, life insurance, and best of all, investments.
How much can you actually save using 80C?
If you are an investor and you fall in the 30% tax bracket, you can save a maximum of Rs.46,800 (31.2% of Rs.1,50,000) from your tax liability.
While if you are in the 20% tax bracket, the maximum tax savings are Rs.31,200 (20.4% of Rs.1,50,000).
If you are a salaried employee, odds are your EPF contributions already take up a good chunk of the 1.5 Lakh deduction but what about the rest?
While a plethora of investment options are available, we think that investments in ELSS have certain advantages that make it the best of the lot.
First, let's look at some of the other popular options available
5-year Bank Fixed Deposit: With a lock-in of five years, a bank fixed deposit is a tax saving instrument which is incredibly safe and returns around 7%–9%. The interest received is taxable, however.
Public Provident Fund (PPF): A statutory scheme of the Government of India (GoI) with an expiry of 15 years, PPF is a widely known tax-saving instrument with tax-free interest receipts.
National Savings Certificate (NSC): A fixed income investment scheme which you can open with any post-office, NSC comes with a maturity period of 5 years with a taxable interest receipt.
Now let's look at an ELSS fund
ELSS funds are a special type of mutual funds that invest in equities and while they are exposed to market risk, the funds are on the conservative side; they hold mostly giant and large caps and generally return between 12% to 15%.
Unlike most normal mutual funds which allow you to withdraw at any time, ELSS funds have a lock-in period of 3 years.
Return from the funds are taxable at a rate of 10% if the profits are above Rs. 1 lakh.
When you put the different options in a table, an ELSS’ advantages are apparent
And it gets better
If you are willing to hold on to the fund beyond the mandatory 3 years, the payoff increases with each additional year.
For example, here’s what the returns on a 1.5L investment look like after 5 years. ELSS beats the rest hands down and the margin will only widen with each year.
If you agree with our rationale, the next step is, of course, choosing a fund.
Choosing the right ELSS Mutual Fund
We are partial to following funds, but we recommend that you do your research.
Motilal Oswal Long Term Equity Fund
If you are looking for professional assistance in choosing the right mutual fund (not just ELSS), Minance can help.
Our investment managers will analyze your needs, future commitments, and financial goals to create a tailor-made portfolio.
You can learn more and make an inquiry here -https://minance.com/mutual-funds
Note: Investing in Mutual Funds with Minance requires a minimum investment of Rs.1 Lakh or a monthly SIP of Rs.20,000.
FAQ
What are the options available under ELSS?
Like most other mutual funds, you can choose between growth or dividend option.
Under the dividend scheme, the investor receives dividends as and when it is declared by the fund, even during the lock-in period. It is convenient for people who require a steady income from their investments. While in growth scheme, dividends are re-invested into the fund and the investor gets a lump-sum at the expiry of the fund-date. It is a good option for patient investors.
When comparing dividend and growth options, the former may give a lower return as compared to the latter because of re-investment in growth scheme.
What is the minimum investment required for ELSS?
You can start out with as low as Rs.500 per year but you are not going to be saving much in taxes that way. If you are unable to invest the entire money at one go, you can also opt for monthly investment through Systematic Investment Plan (SIP).
However, with SIP each monthly installment will have its own lock-in of three years. This implies that installments made on 4th Jan 2019, 4th Feb 2019 and so on will mature on 4th Jan 2022, 4th Feb 2022 and the like.
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