Sunday, July 22, 2018

The Best Tax Saving Option In India - ELSS Mutual Fund (Equity Linked Saving Scheme)

Many people so much effort to earn money, but they don't put even 10% of that to save money from taxes and expenditure. In my post 10 ways to save money, I have talked about some general saving tips, now here you will learn how to save income tax by investing money in the mutual fund. Though there are many ways to save income tax in India, some of them I have mentioned in my post 13 ways to save tax under section 80C and today we'll talk about one of them, called ELSS. It is a special type of mutual fund which stands for Equity Linked Saving Scheme, money invested in it is exempted from income tax. You can save up to one lacs of money by purchasing ELSS mutual fund. Imagine, you have a package of 10 lacs INR, which puts you on the higher side of income tax rates, by putting some money on ELSS scheme, your taxable income automatically reduces, which sometimes can benefit from lower tax rates as well.

Though there are other ways to save income tax e.g. Tax Saver Fixed Deposit, where your money is locked in for 5 years, ELSS only locks your money for three years, after which you can sell your mutual fund units.

The ELSS also has equity benefit associated with it, for example, money invested in equity for 3 years has a better potential of giving higher returns that same money in tax saver fixed deposit.

Also, it exposes you to equity which is better at an early age, it will probably make you learn more about equity investments and how the stock market works. I think investing, at least, some amount of your tax saving money to ELSS if not all, this will not only save a lot of income tax but also provide you better returns.


Well, later part is not guaranteed, though, depends upon various factor e.g. some of the tax saving mutual fund unit bought on 2010 gives very moderate returns, but it all depends upon economic condition and your choice of mutual fund. So do a little research before choosing your mutual fund for investing in ELSS scheme. 

One more trick, which many mutual fund agents tell their client is to invest money in funds, which are going to declare dividend soon. That's another way to get your money out as soon as possible and tax-free.

When mutual fund declares dividend their NAV falls, so suppose you invested 1 lakhs in Birla sun life Tax saving Mutual fund Dividend scheme, which declares 300% dividend then you will most likely get your 30% money back.


By the way, Remember not to choose growth here, which most often doesn't give a dividend, and dividend reinvests, which reinvest dividend. I have done that couple of time, just to take benefit of income tax saving and same time getting money back without breaking mutual fund.

We will see this in more detail in the next section. ELSS or Tax saving mutual funds are in my opinion the best way to save tax and also beat inflation.

A combination of Public Provident Fund (PPF) and ELSS is very good for salaried employees in India. First will give you guaranteed return and safety while second will take care of inflation.



ELSS (Equity Linked Saving Scheme) - Tax Saving Mutual Fund

I came to know about ELSS, popularly known as the tax saving mutual funds, during my stay in Mumbai. Since I have invested in several tax saving funds e.g. HDFC Tax Saver, Birla Sun Life Saver, and SBI Magnum Tax Save, I can say from my experience that ELSS is a very important tax saving scheme.

Why are the tax saving mutual funds good? primarily because of its sheer tax saving and benefit of equity in the long term, as its proved fact that Equity as an asset class leads in terms of long-term investment and can significantly beat inflation.


Since all the tax saving scheme comes with fixed maturity or lock-in period e.g. tax saving fixed deposit are mostly for 5 years, national saving certificate is of 6 years, Kishan Vikash Patra is of 8 years, PPF is of 15 years etc, so if compare all tax saving scheme you will find the only ELSS has the least lock-in period of 3 years.

When comparing with other tax saving scheme, no one provide dividend except ELSS. This can be really useful if you want to take tax benefit and also want some of your principal back.

I remember in 2007 many of my friends invested in Birla Sun Life 96 ELSS tax saving scheme and at that time, this fund declares a big dividend and all my friends got almost there 30-40% money back within one month.

Best Tax Saving Instrument ELSS Mutual Fund

Now days declaring dividend by ELSS tax saving scheme from January to March becomes trends to attract more and more investor during the peak time of tax saving period. Also, most of the ELSS schemes have been long enough and they have witnessed several Market rise and fall and


When one assess the performance of any fund this is a most important factor.

Also, no tax saving scheme provides facility like Systematic Investment Plan (SIP) which ELSS does through which one can invest a small amount every month as compared to lump sum investment and get tax saving.

Though it's completely personal choice where to invest for tax saving, ELSS remains favorite among many of investor because of its unique offerings along with tax saving benefit.


Important points about ELSS tax saving scheme – Mutual Fund

So for summarizing here are the main benefits of ELSS tax saving scheme based on my experience.

1. Least lock-in period of 3 years compares to other tax saving instrument.

2. The benefit of Equity investment for long-term, can beat inflation and give decent returns (20-30% approx).

3. Can get significant money back via dividend if invest at the right fund and the right time, mainly during peak tax saving period of Jan-march also dividend is provided over the lock-in period.

4. Easily access your can track performance on websites for these funds.

5. Can choose SIP, Systematic Investment Plan.


Though tax saving mutual funds have several benefits over other tax saving scheme it does have some disadvantage also e.g. Risk is high because all your investment is on equity, so could result in principal loss in case of market crash,  but taking benefits of ELSS into account its stands out as one the best among tax saving scheme.

Almost all the banks like HDFC, Kotak Mahindra, SBI, ICICI, Morgan Stanley, Goldman Sachs and many other NBFC (NonBanking Financial corporation) like Reliance capital are offering tax-saving mutual fund scheme also known as ELSS.

My favorite Birla Sunlife Tax saving scheme it's from Birla Mutual fund and it's very old, one good part of this tax saving mutual fund is that it declares frequent dividend which means despite 3 years locking period in the tax saving mutual fund you will get your money coming back to you.

Another tax saving mutual fund which I like is HDFC tax saver fund, which has given over 20% compounded interest rate over the last few years.

Other Tax Saving Investments Articles you may like
How to save more tax by investing in NPS (National Pension System)?
3 ways to avoid TDS on bank fixed deposits?
Tax benefits of Rajiv Gandhi Equity Saving Scheme
Tax benefits of NRE Saving account in India
10 Things NRIs should know about Income tax in India
In Aadhaar Card Mandatory for filing Income tax in India
Is NRIs' overseas income taxable in India?

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6 comments:

  1. What are the other tax saving option available for a salaried person in India?

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  2. Well explained about tax saving schemes. Other options would be to buy a house and pay the loan.

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  3. Hi

    I am a NRI and have been doing some investment of late. One question I have is - Does it make sense for a NRI like me to invest in ELSS (which are targeted for Captial appreciation as well as Tax Saving) ? I don't stand to gain anything speicifc from tax saving, isn't it?

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    Replies
    1. @Anonymous, you can if you have income via investment, rentals or NRO fixed deposit in India. You can further reduce your taxable income by investing in ELSS. As you said it's best for capital appreciation but you can also reduce 1.5 lakh from your taxable income, if you put all your deduction into ELSS.

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  4. Hi you posted auxiliary information to saving tax. Every tax payers might think about tax saving funds to save their taxes. So everyone should read this article who are coming under tax slab.

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  5. I hold some Mutual Fund Units, in which I am the first holder and my status is Person of Indian origin (PIO). Can my sibling be the second holder if he is a resident Indian?

    ReplyDelete