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Jan 23, 2020 | Source: AxisDirect-O-Nomics
Comparing ELSS with other tax saving options
Wealth accumulation is not only about generating good returns but optimizing them through tax saving investments. Hence, tax-saving products have always remained popular with investors as it is an important component of wealth generation.
Generally, there is a mad rush for investing in tax-saving tools during the fag end of the financial year. A large number of salaried taxpayers, make tax saving investments without much planning, thought and research during the tax filing season. The end result is loss of wealth as taxpayers soon realize their folly and go for premature exits or discontinue the investment altogether.
However, for smart investors, tax planning is a powerful tool to optimize tax savings and minimise tax liability by making good investment choices. The Income Tax Act of 1961 allows for ample tax saving options under sections 80C, 80CCG, 80CCC and 80CCD.
Among the many tax saving options available to investors, Equity Linked Saving Scheme (ELSS) has been one of the most preferred tax saving investment avenues in India. There are several advantages of ELSS investment over other tax saving products. Below we will explain why ELSS is the best choice for taxpayers – whether for the short-term or long-term.
What is an ELSS?
An Equity Linked Saving Scheme (ELSS) is basically a mutual fund that allows you to save taxes. This type of mutual fund is linked entirely to the equity market so it carries some level of market risks. The only difference between ELSS and other mutual funds is that it has a minimum lock-in period of 3 years – whether you invest in lump sum or go through the SIP route.
When you invest in this tax saving mutual fund, you don’t have to pay long-term capital gains (LTCG) tax on returns up to Rs. 1 lakh and you can get tax deductions of up to Rs. 1.5 lakh in a financial year under Section 80C. Apart from the tax benefit, you also have the choice to invest in a growth fund or opt for one that offers dividends.
How ELSS is better than other tax saving products?
Indian taxpayers have several options to make tax saving investments, which includes Public Provident Fund (PPF), National Savings Certificate (NSC), Unit Linked Insurance Plans (ULIPs), National Pension System (NPS) and tax saving fixed deposits. However, ELSS is the most popular option because it has several advantages over other tax saving products.
Better returns on investment
Investing your money to save tax and then getting good returns on your investment is similar to having your cake and eating it too. ELSS funds have consistently provided better returns than PPF and FDs, and are at par with ULIPs and NPS.
Since ELSS is a diversified mutual fund, managed by highly experienced and professional fund managers, the returns are comparable with other mutual fund schemes. And, mutual funds have historically given the highest returns after direct equity investment. The best part is that ELSS investment offers you the advantage to grow your wealth while beating inflation that eats away the returns on your investment. At the same time, you can get tax deductions of up to Rs. 1.5 lakh on your ELSS investment every year.
For example, the Axis Long-Term Equity Fund has provided consistent returns over the long-term and has been ranked No. 1 in the ELSS category by CRISIL.
Shorter lock-in period
Other traditional tax-saving instruments such as NSC and tax-saving FDs have a lock-in period of five years. While PPFs have a lock-in period of 15 years, NPS and EPF require you to stay invested until your retirement.
Comparatively, ELSS has a lock-in period of only 3 years and interestingly has a track record of higher returns for a 3-year period.
Systematic investment plan (SIP) option
You can invest in an ELSS by starting an SIP with as low as Rs. 500 per month. While other mutual fund schemes allow you to exit anytime, ELSS, a tax saving mutual fund, helps inculcate financial discipline as you have to stay the course for the next three years. So, it not only increases your savings and offers tax benefits, it also helps you gain skills in wealth management basics through financial discipline.
Lower cost structure
The other investment product that may provide similar returns to ELSS are ULIPs or Unit Linked Insurance Plans. However, the problem with ULIPs is that there are too many costs that are deducted from the investor’s premium to pay for expenses incurred in managing and operating the fund.
A ULIP may incur extra costs for fund allocation, fund management, switching of funds, mortality charges, etc., which erodes the returns. ELSS schemes have none or negligible cost structure and there are hardly any charges on exit, if you continue the plan for at least 3 years.
ELSS investments are no doubt the best tax saving options for Indian taxpayers. It has a transparent system and a lower cost structure than ULIPs. With ELSS you have to potential to create wealth while enjoying tax free returns.
You can easily invest in an ELSS scheme such as the Axis Long-Term Equity Fund directly online and upload your KYC documents to get started.
With Axis Direct’s 3-in-1 Savings, DEMAT and Trading account, you can invest in ELSS, other mutual fund schemes, ETFs, Equities, IPOs, Derivatives and much more.
Happy Tax Saving!
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