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Those who have recently launched their professional career are always excited about their monthly salary. Salary means shopping, restaurant, movies, adventures etc. But what they do not understand is that they need to first save a dedicated amount from their monthly income and invest so that this amount grows and helps them in wealth creation. What the young generation also doesn’t follow is that investing in tax saving instruments is essential. Why do you want to give your money to the government when you can invest and bring down your tax liabilities and at the same time give yourself an opportunity to earn capital gains in the long run?
Equity Linked Saving Scheme, offered referred to as ELSS in the investment industry, is an open ended tax saving mutual fund scheme. ELSS is the only mutual fund scheme that is eligible for tax deductions. ELSS comes with a lock in period of three years. This gives your ELSS investment an opportunity to multiply and grow into a decent corpus in the long run. As compared to other tax saving schemes, ELSS comes with probably one of the shortest lock in period.
Here’s an example to help you understand how ELSS can help you save tax:
Dev Kiran is a media professional with an annual income of Rs. 12 lakhs. This lands Dev in the thirty per cent tax slab. Dev finds about a tax saving scheme called ELSS and invests Rs. 1.5 lakhs in the scheme. According to Section 80C of the Indian Income Tax Act, 1961 investments of up to Rs. 1.5 lakhs are eligible for tax exemptions. So, by investing in ELSS, Dev has not brought down his gross taxable income to Rs. 10.5 lakhs.
Also, since ELSS comes with a predetermined lock in period of three years, the investment amount may continue to accrue interest and help Dev build a decent corpus.
Why is ELSS a better investment option for saving tax?
ELSS offers multiple investment option for investors – They can either make a one time lumpsum investment right at the beginning of the investment cycle or go with the option of Systematic Investment Plan (SIP).
Systematic Investment Plan
Systematic Investment Plan or SIP is a systematic investment approach towards ELSS investments. Individuals seeking long term capital appreciation through regular, disciplinary investments usually opt for SIP. To start a SIP, all you need to do instruct your bank and every month on a fixed date, a predetermined amount is debited from your savings account and electronically transferred to your ELSS fund. When the NAV of the fund is low, you are allotted more units and when the NAV is high, a smaller number of units are allotted to investors. This results in the investor benefiting from rupee cost averaging. Also, you may continue investing in ELSS through SIP until your investment objective is met.
Traditional Lumpsum investment
Lumpsum investment is usually opted by those investors who are making last minute investment during the tax season to evade taxes. When you make a lumpsum investment in an ELSS scheme, you invest the entire investment amount at the beginning of the investment cycle. Another good thing about lumpsum investment is that you are allotted a greater number of ELSS units depending on the fund’s existing net asset value or NAV. So, if you have surplus cash parked which you think you can put to better use, you can consider the option of lumpsum investment.
Although ELSS is a unique tax saving scheme, it does not guarantee returns. Hence, it is better to understand your appetite for risk before investing in tax saving equity scheme like ELSS.