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What else but ELSS?

Chintan has to make investments for this financial year in order to avail of tax benefits. Though he knows about a few investment instruments that will help him reduce his overall tax liability, he is unable to decide upon an investment strategy that will help him maximize returns and save taxes too. He approaches his friend Gynanesh, a financial advisor with over 15 years of experience, who explains to him the benefits of investing in an Equity Linked Savings Scheme (ELSS).

Chintan: I need to plan my tax investments for this financial year in order to avail maximum tax benefit u/s 80C. I have heard of ELSS. Can you provide more insight about it? Does it give me any tax benefit?

Gynanesh: Equity Linked Savings Schemes (ELSS) is an ideal way to save on tax as well as enjoy the benefits of staying invested in the equity markets. There are a plethora of tax-saving instruments like the National Savings Certificates (NSC), Public Provident Fund (PPF), Bank term deposits which have a fixed maturity period and fixed returns. On the other hand, ELSS provides you with an opportunity to access market linked returns as ELSS invests in equities and equity related instruments. Under section 80C of the Income Tax Act 1961, investments upto Rs 100,000 are eligible for deduction from your gross total income thus reducing your total taxable income.

Let’s consider two different instances. Scenario I invest in tax saving instruments & Scenario II does not invest in tax saving instruments (which clearly highlights the advantage of claiming deduction u/s 80C).

Assume that your annual gross income is Rs 525,000 and out of this you have invested Rs 100,000 in tax-saving instruments (while you can invest the entire Rs 100,000 in ELSS). The computation of your taxable income for the Financial Year 09-10 will be as follows:

Particulars	Amount (Rs.)
Particulars	Scenario I (with Sec 80C)	Scenario II (without Sec 80C)
Gross total income	525,000	525,000
(-) Deductions U/s 80C	(100,000)	Nil
Taxable income	425,000	525,000
(-) Tax liability*	(39,000)	(61,500)

Illustrated for an individual male assessee below the age of 65 years.
The above tax liability does not consider the Education Cess, if any.

Chintan: What are the benefits of investing in ELSS over other tax-saving instruments?

Gynanesh: Let me list down some of the benefits of ELSS for you:

Investments in ELSS will enable you to claim deductions under section 80C. A maximum of Rs 100,000 can be invested.

Since this is an equity-linked scheme, the earning potential is high (although at a high risk) as compared to other tax-saving instruments. Therefore, a Systematic Investment Plan (SIP) can be used effectively to invest in ELSS as the concepts of rupee cost averaging and the power of compounding work well.

The lock-in period is the one of the shortest, 3 years, as compared to other tax saving instruments. The maturity period for NSC and PPF is 6 years and 15 years respectively.

According to current tax laws, long-term capital gains on investment in equity oriented funds and the dividends received on these investments are tax-free.

Comparison of ELSS with conventional tax saving options:

Parameter	PPF	NSC	ELSS
Returns	Fixed Returns	Fixed Returns	Market Linked returns
Interest Receipt	On maturity	On maturity	Dividend received incase of Dividend option as and when declared (Depends on performance)
Taxability of Income	Tax-free	Interest Taxable	Tax-free
Tenure	15 years	6 years	Minimum 3 years
Maximum Investment	Rs. 70,000 p.a	Rs. 100,000 p.a	No upper limit*

* There is no upper limit on investment is ELSS. However, investments of only upto Rs 100,000 are allowed to be claimed as deductions under section 80C.

Chintan: Can I redeem my investment before the lock-in period ends? Is there any liquidity option in ELSS investments?

Gynanesh: No. The amount cannot be withdrawn before the end of the lock-in period. However, ELSS is definitely beneficial as compared to other tax-saving instruments, as the lock-in period is just 3 years compared to the maturity period of NSC (6 years) and PPF (15 years) respectively. Premature withdrawal from other tax saving instruments may be allowed on specific conditions.

The earning potential of ELSS is high, although at a relatively higher risk. You can opt for the dividend option in ELSS; dividends are tax-free, thus ensuring some liquidity and the opportunity to book profits during the lock-in period.

Chintan: My father has invested in mutual funds, but what is the difference between diversified equity schemes and ELSS?

Gynanesh: ELSS and diversified equity schemes mutually carry the same risk profile. They are high risk - high return investment avenues. One of the major differences is in terms of the mandatory lock in period of 3 years applicable to ELSS.

It is always advisable for investments in equity linked instruments to be for the long term, as it is over this time period that equities have the potential to unlock value and outperform other comparable assets. The lock-in period fixed for ELSS supports this view and also allows the fund manager to plan a strategy that will be beneficial in the long-term.

Not to forget the tax benefits associated with ELSS which makes them look even better than those of diversified equity funds.

Chintan: Lastly, what should be my investment strategy for ELSS funds?

Gynanesh:

Be Rational: First, you need to calculate how much you need to invest in tax-saving instruments and then accordingly evaluate your risk appetite towards each of the investment avenues. Take an informed decision; invest taking into consideration the risk – reward inherited in each tax saving instrument.

Invest in a staggered manner: Use the Systematic Investment Plan (SIP) method for investing in tax-saving funds. Not only does it do away with the need for timing markets, but it also reduces the strain on your wallet at the end of the financial year when others are still conducting their tax-planning exercise.

The views expressed above are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Mutual Fund will not be liable in any manner for the consequences of such action taken by you. Please consult your financial/Investment advisor before investing.

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