ELSS Tax Saving Mutual Funds Rufino D'souza

We will soon be at the end of our fiscal year. It is this time of the year when many of us make tax planning investments. Many of us are aware of 80C, which gives tax exemption for different types of products such as National Saving Certificate (NSC), Unit Linked Insurance Plans (ULIP), Endowment policies, Public Provident Fund (PPF) etc. All of us are keen to choose the best tax saving option which will give us the best tax saving benefits. In this article, we will talk about ELSS Tax Saving Mutual Funds or ELSS Mutual Funds.

ELSS (Equity linked saving schemes ) are becoming a very popular option due to its benefits. Today, we will look at some of the top pointers which will help us understand better as to Why ELSS is a better tax saving option.

ELSS Tax Saving Mutual Funds

1. ELSS provides one of the highest returns.

ELSS are tax saving mutual funds which invest in equity related instruments. Many of us understand equity as a highly volatile asset group. Though equities are volatile, yet most of the time they beat all other asset classes, including bank deposits and fixed income groups over the long term.

A long-term investor in ELSS can expect to get over 12% – 15% annualized returns, which cannot be given by any other Sec 80C product. Sometimes Equity oriented ULIPs give almost similar returns as ELSS, but the high fund management costs and other charges in the fine print, make it a more expensive option as compared to ELSS.

2. ELSS helps in instilling financial discipline in your portfolio management through SIP.

ELSS helps you to invest a regular amount of money on a monthly basis through Systematic Investment Plan (SIP). This is one of the biggest advantages enjoyed by people of every section of society. It allows you to invest a small amount regularly, which further helps you to save and invest regularly. As you are spreading your investments over the entire year, it helps you to average your investment cost during the time of a market downturn. So irrespective of market up’s and down’s , the investments will help you achieve a healthy average return.

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3. ELSS has one of the shortest lock-in-periods.

Most of the ELSS funds come with a lock-in- period of 3 years, which is the lowest amongst the Section 80C products. Most of the other Sec 80C products like NSC, PPF, ULIP etc., come with a minimum lock-in period of 5 years and above. If you invest in the National Pension Scheme, then you need to be prepared to stay locked-in until your retirement. Even Fixed Deposits need to be kept for a minimum term of 5 years. This is an important point regarding the lock-in period of ELSS.

4. ELSS has a tax free dividend at maturity, only if the gains are < Rs.1Lakh.

ELSS  is one of the most tax-friendly investments as not only the initial investment but also the dividend income is tax-free. The fund is not obliged to pay dividends to the investors but if they choose to, then the same would only reflect the superior performance of the fund. We all are aware that the interest earned on a Savings Bank Account, Post Office Scheme, Fixed deposits or National Saving Certificates are taxed according to your respective tax slabs. Further, pension plans are also taxed at the time of maturity. However with the application of the new LTCG rule, ELSS will also be taxed over the long term at the rate of 10 %. However, this rate is applicable only on gains above Rs.1 lakh. Also, you need to keep in mind that the cost of acquisition for all units purchased before 31^st Jan 2018 shall be taken as the higher of the below 2 ie.

1. The Price on the actual date of purchase
2. The Price as on 31^st Jan 2018

For eg. assume that 10,000 Units were purchased on 3^rdMarchh 2015 at an NAV = Rs.25. Also assume that the NAV as of 31st Jan 2018 is Rs.22.

Hence in this case, the Cost of Acquisition would be 10000 x Rs.25 = Rs.2,50,000/-

Now assume these units are sold after 1^st April 2018 at an NAV = Rs.40. The Amount from the sale would be = 10000 x Rs. 40 = Rs.4,00,000/-

so Capital Gain is

= Amount from Sale – the Cost of Acquisition.

= Rs.4,00,000 – Rs.2,50,000 = Rs.1,50,000/-

Thus LTCG tax would be calculated @ 10% on the amount above Rs. 1 lakh ie. on Rs.1,50,000 – Rs.1,00,000 i.e. on Rs 50,000/-

So LTCG is 10% of Rs.50,000/- = Rs. 5,000/-

Units sold before 1^st April 2018, will not attract LTCG tax.

5. ELSS investments save tax.

ELSS funds offer a tax deduction upto Rs.1,50,000/-  under section 80C of the Income tax act. Further, there is no exit load, so it becomes a very popular tax saving option.

6. Comparative analysis of why ELSS Option is better than any other Tax Saving Option.

The following comparative analysis will give you an understanding on why ELSS  is one of the best tax savings option.

Investment	ELSS	PPF	FD	NSC	NPS
Lock-in period	3 years	15 years	5 years	5 years	Till retirement
Tax on returns	No	No	Yes	Yes	Yes (partially)
Approximate returns	12-14%	7-8%	6.5-7.5%	7-8%	7-8%
Type of Return	Equity linked	Guaranteed	Guaranteed Upto 1 Lakh	Guaranteed	Debt and Equity Linked

7. ELSS is one of the best vehicles for achieving your long-term goals.

Let us look at some of the important tips to be remembered while investing in ELSS.

• Study and compare the past performances of Mutual Funds.
• Understand and compare Returns for a period of 3 years to 5 years or above, to get a proper understanding of a fund’s performance.
• Investment in ELSS is mainly done keeping in mind long-term goals like your children’s education and retirement funds.
• ELSS can be easily done through an online facility and is completely transparent. You get an email instantly as your investment proof.
• With proper planning in advance ELSS can be done by both methods, i.e. lump sum and/or SIP and simultaneously obtain the benefits of tax saving under 80C as well as help in achieving your long-term goals.

The above details will help you in understanding ELSS and why ELSS is a popular tax saving choice for many people. It is good to start investing in ELSS early in life i.e. at the starting point of your career in order to be comfortable and to get the best benefits in the long run. Continuous reading and understanding the concepts of ELSS will give you the confidence to invest in the right funds.

Hope you enjoyed this article on ELSS Tax Saving Mutual Funds. 

About the Author :

Rufino Dsouza is a Certified Financial Planner who specializes in  the following Services :

• Client wise portfolio management.
• Investment seminars. 
• Investment solutions and goal planning.
• Tax planning, and effective investment tools for the same.

Rufino’s Contact details are given below :

• Phone – 7021651902 ( whatsapp/call)
• Email – RndInvestments9@gmail.com
• FB page – rnd investments 
• Instagram – rnd investment

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