Dear Readers,
Warren Buffett has rightly quoted “Don’t save what is left after spending; spend what is left after saving”.
We all know that it is important to save funds for future needs. Wouldn’t it be great if our savings can fetch some earnings and also provide us Tax Benefits?
This being the time of the year when there is a rush among tax savers to invest as they have to submit proofs to their employers. Investors can save tax by investing up to Rs. 1.5 lakh under Section 80C of the Income Tax act. With markets in the midst of a bull run, equity-linked savings schemes (ELSS) of mutual funds are increasingly finding takers due to their lowest lock-in period of three years, as compared to other options, such as PPF, NSC and bank fixed deposits
Well, we at Richvik would like to introduce you to one of the best Tax Saving Investment Scheme for our readers.
Q) What is ELSS?
ELSS i.e. Equity Linked Saving Scheme is an open-ended Equity Mutual Fund that helps you save tax, and also gives you an opportunity to grow your money. It qualifies for tax exemptions under section (u/s) 80C of the Indian Income Tax Act up to Rs.1,50,000 .
The lock-in period of an ELSS is 3 years and invest a majority of their portfolio in the stock market.
Q) How can one invest in ELSS?
Investments in ELSS can be made in lump sum, but the recommended way is through Systematic Investment Plans (SIP) that allows you to average your investment and save you from catching a market peak.
Do remember that each SIP is considered to be a fresh investment and every individual SIP carries a lock-in of 3 years.
Q) When can the funds in an ELSS fund be redeemed?
Let us have a look at a comparative chart on how flexible ELSS funds are as compared to other Tax Saver funds.
| OPTIONS UNDER 80C | ||
| Schemes | Premature Withdrawal | Returns on Maturity |
| Insurance | Limited Flexibility | Mostly Tax Free |
| National Pension Scheme | Subject to Conditions | Taxable |
| Public Provident Fund | Subject to Conditions | Tax Free |
| National Saving Certificate | No | Taxable |
| Fixed Deposit | No | Taxable |
| Equity Linked Savings Scheme | Any amount after 3 Years | Tax Free |
Here, we can clearly see that redemption is pretty easy with ELSS.
Q) Are the ELSS funds Risk Free?
ELSS funds being Stock based, contain some quantum of Risk. They don’t guarantee Risk- Free and Guaranteed Returns because they earn from investments in the equity market. However, the best performing funds have displayed the capability of generating inflation beating returns over the long-term.
Q) What is the Growth and Return Rate with ELSS?
Most of the government-backed tax-saving options are fixed income instruments that offer modest returns.
However, ELSS being Equity based investment scheme have the potential to offer superior returns over a long period. The tax-saving category has returned 22.91 per cent in one year, 14.69 per cent in three years and 18.53 per cent in the last five years. There is a risk involved as well since Capital Markets are involved, however, in a period of three years, the risk can be reduced to a lot extent.
Q) How does ELSS perform as compared with other Tax saving instrument?
Let us look at a comparative chart showing the difference between other Tax Saving Schemes for a period of 30 years and see the resulting figures.
| SR. NO | INVESTMENT CLASS | AMOUNT INVESTED P.A | TOTAL AMOUNT INVESTED | HISTORICAL RETURNS | EXPECTED VALUE IN 30 YEARS | RISK | LOCK-IN | DEDUCTION UNDER 80C | TAX |
| 1 | Unit Linked Insurance Plan | 150,000 | 4,500,000 | 9% | 2,04,46,130 | No market Risks | 20-25 years | UPTO 1.5L | Tax-Free |
| 2 | Public Provident Fund | 150,000 | 4,500,000 | 8% | 1,69,92,481 | No market Risks | 15 years | UPTO 1.5L | Tax-Free |
| 3 | National Savings Certificate | 150,000 | 4,500,000 | 8.50% | 1,86,32,208 | No market Risks | 6 years | UPTO 1.5L | Taxable |
| 4 | Equity Linked Insurance Scheme | 150,000 | 4,500,000 | 14% | 5,35,18,027* | Market Risks involved | 3 Years | UPTO 1.5L | Tax-Free |
*Note: 14% has been taken on prudence basis. In reality, had an investor started investing Rs. 1.5 Lakhs per annum since 1996 , then his invested value of Rs. 33,00,000 would have been valued at Rs. 11 Crore at present.
Analysis of the Table:
- Going by the historic returns of the various tax saving scheme, due to high market returns, the returns as given by ELSS funds have out beaten any other Tax saving Scheme.
- Also, the ELSS scheme being Equity based, the returns fetched are Tax Free in the hands of the Investor. (Returns in Equity funds are exempt from the purview of tax if redeemed after the initial period of one year)
Q) Which are the best performing ELSS Funds?
Here we have listed down some of the ELSS Schemes along with their performance in past 5 years.
| SCHEME NAME | TYPE OF THE FUND | RETURNS | |
| 3 YR | 5 YR | ||
| Reliance Tax Saver Fund | ELSS | 12.31 | 22.08 |
| Axis Long-Term Equity Fund | ELSS | 12.34 | 22.05 |
| Aditya Birla Sun Life Tax Relief 96 | ELSS | 15.98 | 21.66 |
| IDFC Tax Advantage | ELSS | 16.69 | 20.83 |
| Tata Tax Savings | ELSS | 16.69 | 20.87 |
Note: We are not promoting any of these schemes, this is just a representation of how ELSS has performed in the past.
We hope this piece of information was useful for you all. To know more on Investment in ELSS scheme, feel free to contact us.