As the time for annual tax planning begins, investors can look at equity-linked savings schemes (ELSS) of mutual funds for higher long-term returns. An individual can get tax deduction on investments up to R1.5 lakh under Section 80C of the Income Tax Act by investing in ELSS.
Mutual fund companies invest ELSS money in stocks. The funds have a lock-in period of three years, which is the lowest lock-in period as compared to other tax-saving instruments like Public Provident Fund, National Savings Certificate and 5-year bank fixed deposits. If a tax payer invests up to R1.5 lakh in mutual fund ELSS in a year, then he can save as much as R46,350 in taxes a year in the highest 30% tax bracket.
Higher long-term returns
Analysts say an investor must have some equity exposure for higher long-term returns. In ELSS, an investor will not have to look at the performance of individual stocks regularly and the investment is done in diversified stocks and sectors. By selecting a good ELSS fund, an investor not only diversifies, but also gets the tax benefits and better post-tax returns. Returns are dependent on the fund manager’s ability to pick the right stocks.
Since ELSS funds have more than 65% of their corpus invested in stocks, they are exempt from tax on long-term capital gains as is the case with any other equity fund. The dividend income is also tax-free. The returns, however, will fluctuate depending upon the performance of the equity market and the stock selection of the fund manager.
ELSS funds offer Systematic Investment Plans (SIPs) of even R500 which is ideal for salaried investors. By adopting the SIP route, one can stagger the investments which will in turn bring down the risk sizeably. ELSS is the only option among the tax-savings instruments which gives tax-free
dividends apart from likely capital appreciation.
Mutual fund houses offer growth and dividend payout options to investors. The growth option is ideal for a salaried individual because of the compounding benefits in the long run. In the growth option, the investor will not get income during the duration of the investment and will get it only when the tenure ends. This is ideal for those who are not looking at regular dividend payouts every year, but want final maturity payment along with the accumulated dividends for certain goal-based needs such as higher education of children, wedding expenses, down payment for buying a house or a car.
Also, an investor can opt for dividend transfer plan (DTP). The dividend received from ELSS funds can be diverted into another scheme of the same fund house through DTP and it can work with both equity and debt schemes. However, while doing so, an investor must ensure that proper asset-mix is done as too much of equity exposure in one fund house or one asset class may not be a good idea. There should be a balance between debt and equity exposure and it must be according to an investor’s risk appetite.