Experts suggest that the best way to save taxes is investing in Equity Linked Savings Schemes (ELSSs). But does just putting the required amount in an ELSS fund assure your well-being?
Rahul: What are the benefits of investing in ELSS?
Teena: ELSS is an ideal investment for tax planning for many reasons. It has the lowest lock-in period and offers superior returns compared to other tax planning solutions. There is no maximum limit for investment in ELSS, however, tax exemption is available only for investment of Rs 1,50,000 u/s 80C. When it comes to the lock-in period, for a tax-saving fixed deposit it is five years and for PPF it is 15 years, though it allows you to withdraw partially before maturity.
Rahul: So, when should I start investing in ELSS funds?
Teena: Most people invest in ELSS during the beginning of the calendar year, January, February or March for tax planning. But if you are investing in ELSS through SIP, then it is advisable to start early and benefit from the rupee cost averaging and the compounding features of SIP.
Rahul: Should I invest a lump sum or start a SIP in ELSS?
Teena: SIP is better for the reasons I mentioned earlier. Lump sum may be considered if the market has corrected sharply.
Rahul: If ELSS funds give good returns, then shouldn’t I invest more in them?
Teena: ELSS gives good returns in the long-run. The lock-in period of 3 years enables the fund manager to make good long-term bets without bothering about redemptions.
Rahul: How do returns from ELSS match up to PPF and ULIP?
Teena: ELSS returns are far superior to PPF and ULIPs. There are many funds that have delivered more than 15 percent CAGR over long periods.
Rahul: Is ELSS taxable after 3 years?
Teena: The tax benefit is available u/s 80C only for the year of investment. When you redeem after 3 years, the returns are taxable at the rate of 10% if gains are greater than Rs. 1 lakh.
Rahul: Do I have to redeem the ELSS after completing the mandatory lock-in period of three years. Teena: There is no mandatory rule for withdrawing the fund from ELSS after the lock-in period. If the funds are performing well then you may keep the fund in same ELSS scheme (and redeem as when required amount). Also please note that most of the ELSS schemes are well-diversified equity funds.