Why you should not ignore ELSS investments?

ELSS investments are one of the best options for saving tax, have a shorter lock-in period and save up to Rs. 46,800/-

The last date for income tax return filing for the financial year 2019–20 (AY 2020–21) ended on 10th January 2021 and the tax planning for the next year 2020–21 (AY 2021–22) has started hitting the thoughts.

Section 80C investments allow common investing options eg., Public Provident Funds (PPF), Unit Linked Insurance Plans (ULIPs), Equity Linked Savings Scheme (ELSS), tax-saving fixed deposits, post office monthly income scheme and national savings certificates (NSCs) coupled in the overall limit of Rs. 1,50,000/-. However, certain deduction like provident funds, insurance policy premiums already take a small pie out of the available limit; the choice of investment options to consume the remaining limit is confusing. Whether to invest in PPF, ELSS, Fixed deposits or elsewhere does require a cross-feature analysis of all available schemes to ensure funds are safely parked.

ELSS acronym for Equity Linked Savings Scheme is a Mutual Fund scheme which invests in the predetermined ratio in the asset classes — equity shares or debt instruments. These are open-ended mutual fund schemes regulated by the ELSS scheme launched in 2005, i.e., fund manager allots the investor units of the funds as per the Net Asset Value (NAV) of the fund. The funds invest at least 80% of the total corpus in equity or equity-related instruments (convertible preference shares, convertible debentures, etc.).

Investments in ELSS funds are deductible from the gross total income for arriving at the net taxable income to calculate tax at applicable slab rates. Such investments are to be locked-in for at least 3 years to claim tax deductions.

Returns on ELSS are purely market-driven and at times it depends upon the market conditions to liquidate the units post 3 years, but returns have been consistent over the years, and have low volatility since these are mutual funds investing in stocks (and debt) of a particular company/industry in small proportions.

Selling ELSS Funds after 3 years: the units sold after 3 years of lockin period are liable to capital gains tax which is exempt up to Rs. 1,00,000/- and only the portion of gains above 1,00,000 is chargeable to tax (10%) since ELSS are equity-oriented funds.

Investments are ranked on the basis peculiarities as to lock-in period, return on investment (ROI), and the level of risk associated with the returns.

Public Provident Funds (PPF) are government secured instruments bearing interest rates declared by government-paid monthly and have an initial lock-in period of whopping 15 years. On the other hand, mutual funds are market regulated and returns vary with market conditions but are much liquid having mere 3 years of lock-in period for the purposes of claiming tax deductions.

The table below shows the ranking of investments along with the suitable category of investor.

Returns: ELSS have been hitting consistent returns of 8% -10%; which makes them an unavoidable investment and tax planning instrument. Returns of PPF, NSC and post office monthly income scheme (MIS) deposits are 7.10%, 6.80% and 6.60% respectively.

The new tax regime announced in the Finance Budget 2020 allows taxpayers an option to pay tax under new tax slab rates but without deductions under Chapter VI-A i.e., Section 80C deductions. Therefore the ELSS investment based deductions are available when you choose to pay tax under the old regime.

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