4 MinsNovember 13, 2019
Money legitimately saved from tax is money earned. While we all know that we are entitled to tax exemption of up to Rs 1.5 lakh in a financial year, do we truly understand the importance of doing it on time and choosing the right instrument?
One of the simplest tax-saving options available under Section 80C of the Income Tax Act is Equity Linked Savings Schemes or ELSS (also known as tax-saving mutual fund). It is an equity-oriented
mutual fund scheme with a three-year lock-in period. Such funds typically invest across market capitalisation segments, that is, large-cap, mid-cap, and small-cap stocks, and sectors. By investing in ELSS you not only save tax but also earn
inflation-beating returns since you are investing in equities.
Invest early for maximum benefit
Most people start thinking about their tax planning only towards the end of the financial year. Then they end up investing in instruments that may not meet their requirements. For instance, a senior citizen may invest in Public Provident Fund
(PPF) that has a 15-year lock-in. Or someone who is already insured may end up locking money in yet another life insurance plan, just to save tax. Instead, if you plan early, you can compare existing ELSS plans and select one with a good track
record. Choose one based on the fund house, past returns and the fund’s performance in comparison with peer funds.
[Also Read: Investment Tips to Save Your Tax]
How lock-in period helps
The three lock-in period for ELSS is lesser than the lock-in periods for PPF (15 years) and life insurance policies, which are typically purchased for tenures of 15-20 years or more. In the case of ELSS, the lock-in period ensures that your money
remains invested and you continue to earn returns on it. The lock-in also helps to ensure that investors do not withdraw their money in a panic, at the first signs of volatility. To select the best ELSS to invest either in the form of lump-sum
investment or a Systematic Investment Plan (SIP) click here.
Earn returns while saving tax
Go ahead and consider ELSS for your tax planning this year. Since ELSS invest in equities, you can also use it to address long-term financial goals, such as buying a dream home, saving for your children’s education, their wedding expenses,
your retirement, etc. You can seamlessly invest in ELSS through Axis Bank’s online platform.
The minimum amount for most ELSS plans is as little as Rs 500 with no upper limit. However, only a sum up to Rs 1.50 lakh per financial year is eligible for deduction under Section 80C. If you invest the entire Rs 1.5 lakh in ELSS you can effectively
up to Rs 46,800, if you are in the 30% tax slab. Ideally, if the ELSS you invested fares well, it would be sensible to stay invested even beyond the lock-in period of three years to maximise the return potential and accomplish the envisioned
financial goals. Mutual Funds are subject to market risk. Take the help of an advisor to make the right choice.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.