How will ELSS help you save tax, how will you get more benefit on your money? Know the answer to every question

New Delhi.Taxpayers always try their best to save tax, especially under the provisions of Section 80C of the Income Tax Act. There are more than a dozen ways to save tax under this section and choosing the right one is not an easy task. Out of these dozen products, some offer assured returns, while some offer market linked returns. In the highest income tax bracket of 30%, a person can invest a full Rs 1.5 lakh in a financial year under Section 80C and get a real tax saving benefit of Rs 46,800 per year with the current tax rules (with 4% education cess).

When it comes to tax savings, a salaried taxpayer makes significant tax savings through contributions to the Employees’ Provident Fund (EPF). This limits the opportunity to invest the balance amount in other options that offer fixed returns under the Rs 1.5 lakh limit. Among market-linked options, Equity Linked Savings Scheme (ELSS) is better. Let’s 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 in which investments are eligible for tax exemption under Section 80C of the Income Tax Act. As per current tax rules, eligible investors (individuals/HUFs) are entitled to deduct investments up to Rs 1,50,000 (along with other specified investments) in equity linked savings schemes (ELSS) from their gross total income under Section 80C of the Income Tax Act, 1961. The tax saving of Rs 46,800 mentioned above is based on the higher income tax slab. Adding the current 4 per cent education cess on tax including cess, the tax saving per annum will be 31.2 per cent or Rs 46,800 on Rs 1.5 lakh. 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 are dependent on the provisions of the Income Tax Act, 1961 and amendments thereof from time to time. However, it is important to note that tax savings through investment in ELSS is possible only if the taxpayer opts for the current tax rate regime. Under the new tax rate regime, the taxpayer does not get the benefit of any deduction. For investment in ELSS to qualify as an equity fund, the minimum equity investment should be 80 per cent, which can technically go up to 100 per cent. ELSS also has the liquidity to invest across all market capitalisations, making it a flexible and unique investment product among equity funds.

Question: For how long can one invest?
answer: ELSS has the lowest lock-in period of three years, as against the common lock-in period of 5 years in other tax saving instruments. The three-year lock-in means that you cannot sell the units purchased before the completion of three years from the date of purchase. Mutual Funds have been made convenient to invest through Systematic Investment Plans (SIPs) and one can invest throughout the year with as little as Rs 12,500 per month, instead of last-minute panic. However, the lock-in period is different for each SIP instalment, which means each monthly SIP is locked 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 superior returns that are regularly higher than the inflation rate. In contrast, most fixed return tax saving options like PPF, 5-year FD, NSC, etc. barely manage to give returns higher than inflation. Not only this, the fixed returns offered by such tax saving products have declined in the last decade, which is also reducing their attractiveness.

Question: Is there tax on the profit from ELSS
answer: The profit on investment in ELSS and the amount received from redemption is also completely tax free. ELSS provides better post-tax returns, because long-term capital gain (LTCG) up to Rs 1 lakh earned in a year from ELSS mutual funds is exempted from income tax. Tax is payable at the rate of 10 percent on the profit above this limit. Partial or full tax has to be paid on the profit earned from other tax saving options except PPF.

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

Tags: Income Tax, Income Tax Planning, Investment and returns