How will ELSS help in saving tax, how will you get more benefit on your money? Know the answer to all your questions

New Delhi.Taxpayers always try their best to save tax, especially under the provisions of Section 80C of Income Tax. There are more than a dozen ways to save tax under this section and choosing the right way among them is not an easy task. Of these dozen products, some offer assured returns, while some offer market linked returns. An individual in the top 30 per cent income tax bracket under Section 80C can invest the entire Rs 1.5 lakh in a financial year and get a net tax saving benefit of Rs 46,800 per year with the current tax rules (with 4 per cent education cess) .

When it comes to tax savings, a salaried taxpayer can make significant tax savings by contributing to the Employees Provident Fund Fund (EPF). This limits the opportunities to invest the balance in other options offering fixed returns under the Rs 1.5 lakh limit. Equity Linked Savings Scheme (ELSS) is better among market linked options. Let us know the answers to every question from Ajit Menon, CEO (PGIM India Mutual Fund).

Question: What is ELSS?
answer: ELSS is an equity mutual fund category, investments in which are tax exempt under Section 80C of Income Tax. As per current tax rules, eligible investors (individuals/HUFs) can invest up to Rs 1,50,000 (along with other prescribed investments) in Equity Linked Savings Scheme (ELSS) under section 80C of the Income Tax Act, 1961, in their gross total income. Are entitled to deduct from. The tax saving of Rs 46,800 mentioned above is calculated based on higher income tax slab. By adding the existing 4 per cent education cess on tax including cess, the tax saving per annum on Rs 1.5 lakh would be 31.2 per cent or Rs 46,800. Long term capital gains and dividend distribution tax will also have to be paid on this.

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Question: How can tax be saved?
answer: Tax benefits depend on the provisions of the Income Tax Act, 1961 and its amendments from time to time. However, it is important to keep in mind that tax saving through investment in ELSS is possible only when the taxpayer chooses the existing tax rate regime. In the new tax rate system, the taxpayer does not get the benefit of any kind of deduction. To qualify an investment in ELSS as an equity fund, the minimum equity investment should be 80 per cent, which can technically go up to 100 per cent. ELSS also have the liquidity to invest across all market capitalizations, making it a flexible and unique investment product among equity funds.

Question: For how long can you invest?
answer: The minimum lock in period for investing in ELSS is three years, whereas in other tax saving instruments a lock in period of 5 years is common. A lock-in of three years means that you cannot sell the units purchased before the completion of three years from the date of purchase. Investing in mutual funds has been made convenient through Systematic Investment Plan (SIP) and one can invest throughout the year with Rs 12,500 per month instead of last-minute panic. However, the lock-in period varies for each SIP instalment, which means each monthly SIP is locked in for a period of 3 years.

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Question: Way to get better returns
answer: Another reason to choose ELSS as a tax saving option is its potential to provide high returns. Investing in equity effectively provides better returns which regularly exceed the inflation rate. On the contrary, most of the fixed return tax saving options like PPF, 5 year FD, NSC etc. hardly manage to give returns above inflation. Not only this, the fixed returns from such tax saving products have decreased in the last decade, due to which the attraction towards them is also decreasing.

Question: Tax is levied on profits from ELSS
answer: The profit on investment in ELSS and the amount received from redemption are also completely tax free. ELSS offer better post tax returns as long term capital gains (LTCG) up to Rs 1 lakh in a year from ELSS mutual funds is exempt from income tax. Tax is payable at the rate of 10 percent on profits exceeding this limit. Partial or full tax has to be paid on the benefits received from tax saving options other than PPF.

The tax saving as well as wealth creation feature of ELSS makes it a suitable and better first equity investment option for all investors. First-time investors benefit from mandatory lock-in and get incentives through tax savings. Experienced investors can benefit from including ELSS in their investment portfolio to achieve their financial goals. Overall, taxpayers can avail various features of ELSS to reduce their income tax liability, enjoy mutual fund investment experience and build wealth.

Tags: income tax, Income Tax Planning, Investment and return

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