What exactly is an Equity Linked Savings Scheme?

Nov 30, 2018 | 4 months ago | Read Time: 3 minutes | By iKnowledge Team

Excerpt: Compared to the lock-in periods offered under PPF and NSC investments extending from a minimum of 6 to a maximum of 15 years, ELSS offers long-term benefits with short-term investment.

Credit: FinancebyKD

With the big boom in India’s investment sector, plenty of savings schemes are now available in the market to assist you with financial planning and secure your future. Public Provident Fund (PPF), National Savings Certificate (NSC) and bank fixed deposits are some of the investment schemes which are extremely popular among first-time investors in India, but these plans are taxable and also suffer from the disadvantage of locking in your investments for a long period.

 

Equity Linked Savings Scheme (ELSS) stands out

The dual-purpose of an ELSS serves and benefits you on two major fronts. First, the returns from ELSS schemes are generally higher than those offered by the most rival schemes in the market due to the equity linkage. Secondly, ELSS is only partially taxable, which is the second purpose and perhaps the most important advantage of ELSS. Returns were entirely non-taxable until 31 March 2018[1], following which a tax rate of 10% has now been levied for profits which exceed Rs. 1 lac.

Alongside these major benefits, the lock-in period of just 3 years, which is significantly lower than that offered by other schemes, should be the only incentive you need to invest in ELSS right now. Compared to the lock-in periods offered under PPF and NSC investments extending from a minimum of 6 to a maximum of 15 years, ELSS offers long-term benefits with short-term investment. Even bank Fixed Deposits, the most commonly availed scheme in the country that are eligible for tax deduction are also locked in for 5 years.

Things to remember before investing in ELSS

Considered to be one of the best ways to save tax in India, ELSS funds offer investment opportunities in the equity markets, along with the obvious benefits of tax deduction. Broken down to its most essential elements, an ELSS is actually a diversified equity mutual fund with a majority of its corpus invested in equities, whose returns reflect those from the equity markets.

This type of mutual fund has a lock-in period of 3 years from the date of investment but you can exit after 3 years by selling it. Contrary to common misconceptions, a Systematic Investment Plan (SIP) is not the same as an ELSS. In fact, if you start an SIP in an ELSS, then each of your investments will be locked in for 3 years.[2]

Furthermore, ELSS funds have dividend and growth options like other popular and privately purchased equity funds, allowing investors to receive lump sum returns upon the expiry of 3 years, unlike a dividend scheme where investors get a regular dividend income.

Source: Quora

So why is ELSS the best tax-saving option?

Equity Linked Saving Scheme or ELSS is a tax saving mutual fund where you can save up to Rs. 1.5 lac in a financial year under Section 80C of the Indian Income Tax Act. While tax planning may seem to be a difficult process, Mutual Funds offer you a simple way to get tax benefits, that help you make the most of the burgeoning potential of the equity markets today.

An Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that doesn’t just help you save tax, but also gives you an opportunity to grow your money. Designed specifically to act as an exemplary tax savings plan, the popularity of ELSS is steadily growing. A well balanced financial portfolio must begin with a life insurance cover that provides comprehensive protection. Consider the iTerm Plus plan from Aegon Life which provides not just death benefit but also protection against up to 36 critical illnesses, depending on the variant selected.

ELSS and life insurance can be effective in tax savings but be sure to begin your tax planning at the beginning of the year as opposed to rushing through it at the last minute!

II/Oct 2018/4491


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