Want to save tax? Invest in ELSS now

[K.Karthik Raja]

Want to save tax? Invest in ELSS now

For the high-income individuals, equity-linked saving schemes are a
good way to save tax.

Investor: Section 80C has several instruments that qualify for the
deduction of Rs 100,000 from

my gross total income. Some of the important ones I know are Provident
Fund, Public Provident

Fund, National Saving Certificates, LIC [Get Quote] premium, ELSS of
mutual funds, Pension Funds

and others. Which is the best avenue?

Advisor: While it would be difficult for anyone to single out one
single instrument that is best

for everyone across the board, you must appreciate that the list of
eligible instruments is kept

wide enough to cater to different classes of investors by the income
tax authorities.

For instance, someone who is risk-averse can opt for life insurance or
five-year deposit with a

bank. For someone keen on saving tax, even on income arising out of
the instrument would prefer

PF or PPF. Then, for the young and high net worth, with a good risk
appetite can go for ELSS.

Investor: Tell me more about ELSS.

Advisor: ELSS is abbreviation for Equity-Linked Saving Scheme. This is
one of several schemes by

the mutual funds and is popular among high net worth tax payers
because of their unique features

Investor: What are these unique features?

Advisor: As the name suggests, this is a scheme which predominately
invests in equity shares of

companies. Under the regulations, the scheme has to invest 80 per cent
of its corpus in the

equity shares and the balance 20 per cent can be invested in other
instruments like bonds,

debentures, government securities and others.

Investor: This implies that by putting my money in ELSS, I am
participating in the stock markets

and therefore, exposing myself to risky investment.

Advisor: Yes, you are. But the advantage here is that there is no
direct participation in the

stock markets or in a particular stock. So, you have a basket of
stocks that have been selected

by professionals.

Since these professionals or fund managers, as they are known have
access to elaborate research

facilities and insights into the functioning of the companies and
consequently, you get the

benefit of those skills which go into systematic stock selection.

Investor: Are there any other benefits?

Advisor: The other benefits come on the taxation front. If you are
making an investment in of Rs

100,000 you will be entitled for a deduction equal to Rs 100,000 from
your gross total income

under section 80C.

In other words, someone who is in the highest income bracket of 34 per
cent (30 per cent + 10

per cent +3 per cent), investing Rs 100,000 in ELSS reduces the tax
liability by Rs 34,000.

Effectively, it means that you would have invested only Rs 66,000
because you are getting a

benefit of Rs 34,000 on Rs 100,000. Assuming the mutual fund declares
a dividend of 9 per cent,

your return on Rs 66,000 would work to 13.63 per cent (9,000/66,000 �
100).

Investor: What else?

Advisor: This is not all. This dividend of Rs 9,000 on your own Rs
66,000 is totally exempt in

your hands under section 10(35). In effect it is tax free return in
your hands.

Investor: What are the other tax implications?

Advisor: There is yet another bonanza from ELSS awaiting you and that
is: whatever capital gain

that you will make on this investment after a lock in period of three
years is also totally

exempt from tax in your hands under section 10(38).

Investor: That is great news

Advisor: Yes. This is what makes ELSS the most attractive investment
for those who have the

appetite for moderate risk. However, before you rush, do select a good
fund house based on its

reputation and track record.