Wealth creation through equity has been the foremost investment objective of most retail investors since long. Mutual funds have gained trust and popularity over the years as they provide safety of investing in equities minus the risk of investing directly. In recent times, a considerable number of investors have started shifting their focus towards Tax saver Mutual funds or Equity Linked Saving Schemes (ELSS). Before jumping to benefits of ELSS, let us understand the barrier which kept some taxpayers away from this wonderful instrument.
The Perceived Risk-Return Apprehensions
That barrier or fear about market-linked returns and its perceived inherent risk is tackled by going easy way towards guaranteed return options like PPF etc. Obsession towards guaranteed return or so-called safety of capital makes people blinded to the fact that since June 2011, interest rates on small savings schemes like the PPF and NSC are linked to the average 10-year G-sec yield with similar maturity in the preceding year and these rates are reviewed and changed when necessary. Returns should not be the lone criteria; for example, monthly PPF contributions over the years resulted in reduced maturity amount due to rate reduction. Isn’t that risky too? Yet, risk-averse and traditional taxpayers abide by these products.
The ELSS has equity exposure and short lock-in of three years and there are multiple schemes to choose from. A disciplined investor can take SIProute also with a SIP of Rs 12,500 a month to maximize the Rs 1.5 lakh tax savings under Section 80C. The ELSS category average returns over the past 15 years are in the 11-12% range, which is significantly higher than other instruments. Further, if held for longer term like PPF, returns are much better.
ELSS and Taxation
Tax deduction ceiling for ELSSis Rs 1.5 lakh and with the income tax slab rate of 30% (including 4% cess), one could save up to Rs 46,800. The wealth creation or growth of investments is subject to long-term capital gains tax (LTCG) at time of redemption after the mandatory three-year lock-in. It is noteworthy that LTCG exempts mutual fund gains of up to Rs 1 lakh a year from income tax and gains above Rs 1 lakh are taxed at 10%. Better returns, coupled with tax savings make ELSS an attractive instrument to invest.