In this edition of GEPL elearning we will discuss how to get the maximum returns from investments made for tax exemptions. Routine investment options like PPF, NSC or ULIP are either very long term or the returns are very low. Equity Linked Saving Scheme or popularly known as ELSS is a good option where you can save tax and get good returns. ELSS is a mutual fund scheme that invests in equity and equity related securities. Investments in ELSS are eligible for deduction up to Rs. 1 Lakh under section 80C of the Income Tax Act 1961.
ELSS investments have a three year lock-in period that allows the investor to participate in the long term growth potential of equity markets. The three year lock in enforces a discipline on the investor that prevents him from impulsive redemption in case of market volatility. Secondly, the fund managers of tax saving gets a longer time horizon to manage the funds in a better way.
In comparison to ELSS other investments under section 80C like PPF, NSC, etc. offer a fixed return with a longer lock-in – period like 15 and 6 years respectively, where as ELSS has lock-in period of only 3 years. Minimum investment in ELSS is Rs.500/- as against Rs.1000/- for PPF and Rs.10000/- for ULIP. In NSC and ULIP gains and returns are taxable where as in case of ELSS dividend is tax free and no capital gains tax too.
In our opinion the investor should consider four factors before investing: Risk, Return, Liquidity, & Tax Efficiency. If you require tax benefits, liquidity has to be compromised. Similarly, return and risk have an direct relationship. ELSS funds offer the optimal balance among these four factors and therefore we strongly recommend investment in ELSS.