Tax Saving With Mutual Funds - ELSS

It is time for employees to give documents to back up their section 80C investments declaration made at the beginning of the financial year to save Income tax. Checkout how ELSS Mutual Funds can help to save tax.

No wonder, this is also the time when mutual funds and distributors aggressively push equity-linked savings schemes (ELSS) as tax free saving instrument because one gets tax relief under section 80C for investing in these schemes. In fact, some fund houses pay higher upfront fees to distributors for promoting ELSS.

Tax Saving With Mutual Funds - ELSSReturns from these schemes have been at par with the Sensex returns in the last three-five years. According to data from Value Research, a mutual funds rating agency, these schemes have returned almost 83 per cent in the last one year, as against 76 per cent by the Sensex. In the last three and five years, while these schemes have returned 9 and 21 per cent, the Sensex has returned 8 and 22 per cent, respectively.

There are other tax saving investments such as Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), unit-linked insurance plans (Ulips), various insurance policies and principal repayment on home loans.

Many feel ELSS Mutual funds have twin-advantage: Besides giving tax benefits, it also leads to ‘forced savings’ because of the lock-in period. This allows investors to earn market-based benefits over a longer period of time. While ELSS, NSC and PPF offer tax benefits, the advantage of ELSS is that it offers equity market exposure and shorter lock-in period as compared to NSC and PPF.

For an ELSS investor, there are two options – lumpsum investment or investment through systematic investment plans (SIPs). For employees, who have still not invested to meet their section 80C commitments, it could be a good idea to invest the entire lumpsum. Experts say starting an SIP only for the last four months does not make much sense.

Like all equity schemes, these schemes come with both growth and dividend options. In case, one opts for the growth option, he/she will not get any returns till the time he/she is holding the investment. But returns at the end of three years will get the benefit of compounding along with being tax-free because there aren’t any long-term capital gains tax on equities after one year.