Investors and individuals who have not yet started investing want one thing- to save taxes. Taxes are capable of taking away a substantial amount of your income. Thus, it is important to ensure that you choose an efficient tax saving option. Read on to find out how ELSS can be an efficient tax saving option.
Every investor wishes for sustained high returns. But how? Keep investing for the long-term so that the investments you make are able to fetch you higher returns with the power of compounding.
Under the Indian tax law, savers have various tax saving avenues such as ELSS mutual funds, National Pension Scheme, Public Provident Fund, Senior Citizens’ Saving Scheme, Sukanya Samriddhi Yojana, and others. However, in the journey of saving taxes and making investments, individuals often take dissatisfactory investment decisions.
The main reason is the lack of adequate information to differentiate the goals of tax saving and making investments. Most of the investors make these decisions on pressure because of time constraints. The end results? They take sub-optimal investment decisions. When you find it later, you just console yourself by considering the fact that you were at least able to save taxes. However, if there is a better tax saving option for you, why settle for something that does not provide the maximum benefit? You may do this repeatedly. If this turns into a habit, it can turn out to be expensive in the long-run.
What is crucial to understand is whether the advantages associated with the investment is more than the disadvantages associated with the tax benefits. As an investor, you need to stop making poor decisions due to time constraints. You should also avoid rushing into investments to save taxes without proper thought. What can investors do? They can plan investments as early as possible i.e. at the initial period of the year.
As an investor, ELSS can be the most suitable investment. Many salary earning individuals have some amount going into fixed income through PF deductions. ELSS is the only tax-saving investment within 1.5 lakh limit that brings the benefits of equity returns. Thus, we would recommend equity. There may be other forms of tax-saving investments that one may opt for. But some lack transparency. Others may only be suitable for retirement rather than savings. But the advantage of ELSS is that you can invest as much as you want. Also, unlike many other avenues with a longer lock-in time period, ELSS only has a 3 year lock-in period. The thing to be taken into consideration is that under the Income tax act, only Rs.150,000 in a financial year will be allowed for a tax deduction.
If you are a beginner into investing, ELSS can prove to be an excellent bridge. It can connect you to equity investing as well as mutual funds. Also, the shortest lock-in period and no upper time limits make ELSS the best tax saving scheme. Once you start getting returns from long-term equity investment, you can try other forms of equity investments as well. There are different forms of equity funds depending on the risk appetite.
Now taking three different instruments which are PPF, Nifty 50 Total Return Index and ELSS, based on different scenarios, let’s find out how they perform over a 20 year period. In each instance we take Rs.1.5 lakh as the annual investment made on 1st March every year. Rs 1.5 lakh is taken as that is the upper limit amount required to claim tax deduction and save tax.
The outcome revealed that the corpus of Rs.30 lakh invested for a period of 20 years grew to Rs.2.28 crores in the case of ELSS which is the highest. In the case of Nifty 50 Total Return Index, the corpus grew to Rs. 1.55 crore. The lowest returns was from PPF which only gave Rs.77.82 lakhs returns. The first chart shows PPF returns and the second one ELSS.
In the short-term equity investments may carry higher risks. But in the long-term (five years or more) they not only provide higher returns. The risks also considerably get lower. The best way to invest in equity funds is through monthly SIPs throughout the year. Bank FDs and other similar deposits become sub-optimal due to inflation. SIPs also avoid investors from rushing into anything.
To know more about ELSS and its benefits for saving your taxes, head to a financial planner now.