Why ELSS is best tax saving investments

Nov 07, 2019 12:00 IST 4173 views

Tax saving is a priority of every salaried/ self-employed individual with new financial year around the corner. There are many investment instruments like public provident fund (PPF), life insurance premium, equity linked saving scheme (ELSS), tax saving fixed deposits (FD) with the banks, National Saving Certificate (NSC) that offers tax benefit under section 80C of the income tax act 1961 of up to Rs 1.5 lakh p.a. However, from all the above-mentioned tax saving instruments, ELSS is the best tax saving product for the investors as it offers dual benefit of tax saving and higher returns in the long run as compared to other tax saving instruments. Below mentioned are some of the reasons that make ELSS as the best tax saving scheme as compared to other tax saving instruments.

1. Gives investment option
ELSS offers two investment options - dividend option and growth option to the investors. In growth option the dividend is not paid to the investor by the mutual fund house, investors get a lump sum on the completion of lock-in period of 3 years. On the other hand, in dividend option, the investors get the dividend whenever declared by the fund.

2. Less lock-in period
ELSS has the shortest lock-in period of 3 years as compared to other tax saving instrument. Other tax-saving products like PPF is 5 years, tax saving FD’s with banks and NSC has a lock-in period of 15 years, 56 years and 6 years. Shortest lock-in period allows the investor to withdraw money from the scheme when the need arises.

3. Creates wealth in long run
Historically, ELSS has given an average return of 15% p.a in 5 years, whereas, FD with banks has given a return of 8.50% p.a. for the tenure of 5 years. While PPF rate keeps on changing as per the Government policy. Current interest rate of PPF is 8% compounded annually.

4. Dividends are tax-free
In dividend option, dividends earned are tax-free in the hands of the customer right from the year of investment. In addition, the long-term capital gains from the investment are also tax-free. On the contrary, interest earned on 5 years tax saving FD’s with banks are taxable in nature.

5. Tax exemption
An investor is eligible for tax deduction up to Rs 1.5 lakh p.a. u/s 80c of the income tax act 1961. Suppose, if a person has an annual income of Rs 12 lakh. Total tax to be paid will be ~Rs 1.91 lakh. However, if he invests in ELSS scheme, he can save tax of Rs 46,350 (30% tax bracket) and is required to pay ~Rs 1.44 lakh as a total tax.

Annual IncomeRs. 12,00,000
Tax before investing in ELSSRs. 1,90,550
Tax after investing in ELSSRs. 1,44,200
Tax savedRs. 46,350

ELSS is not only a tax saving instrument but it also creates wealth in long-term. Besides, the long-term capital gain and dividend earned in ELSS scheme are tax-free. Similarly, less lock-in period of 3 years as compared to other tax saving products like PPF and NSC provides financial assistance to the investor at the time of emergency. However, an investor should analyse the different ELSS schemes before making any investments and should select the best tax saving product (PPF, NSC, FD and ELSS) based on his needs and risk appetite.

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