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| ELSS: Tax gain with returns |
| Neha Pandey / Mumbai Dec 17, 2009, 00:20 IST |
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During the last few weeks of the year, accounts departments of companies start asking employees to give documents to back up their section 80C declaration made at the beginning of the financial year.
And for ones, who have not completed their investment, this could be the time to invest quickly. Otherwise, the portion that has not been invested will be deducted from the salary in the next three months.
No wonder, this is also the time when mutual fund houses and distributors aggressively push equity-linked savings schemes (ELSS) because one gets tax relief under section 80C for investing in these schemes. In fact, some fund houses pay higher upfront fees to distributors for promoting ELSS.
Returns from these schemes have been at par with the Sensex returns in the last three-five years. According to data from Value Research, a mutual fund rating agency, these schemes have returned almost 83 per cent in the last one year, as against 76 per cent by the Sensex. In the last three and five years, while these schemes have returned 9 and 21 per cent, the Sensex has returned 8 and 22 per cent, respectively.
To qualify as an ELSS and get section 80C benefits, a scheme has to have at least 65 per cent of its corpus in equities. It also comes with a lock-in period of three years.
There are other tax-saving options such as Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), unit-linked insurance plans (Ulips), various insurance policies and principal repayment on home loans.
As compared to ELSS and Ulips, most of the other instruments are safer because of their lower exposure to equities. That is why many experts recommend other instrument over ELSS and Ulips.
D Sundarajan, chief executive officer, Trendy Investments, said, “We first recommend EPF, PPF and insurance term policies over ELSS.”
However, many felt ELSS had twin-advantage: Besides giving tax benefits, it also leads to ‘forced savings’ because of the lock-in period. This allows investors to earn market-based benefits over a longer period of time.
“While ELSS, NSC and PPF offer tax benefits, the advantage of ELSS is that it offers equity market exposure and shorter lock-in period as compared to NSC and PPF,” said Kartik Varma, co-founder, iTrust Financial Advisors.
Tax benefits are quite impressive. For a person in the highest income tax bracket, investing the entire Rs 1 lakh (section 80C limit) will give them a benefit of Rs 30,000.
For an ELSS investor, there are two options – lumpsum investment or investment through systematic investment plans (SIPs). For employees, who have still not invested to meet their section 80C commitments, it could be a good idea to invest the entire lumpsum. Experts said starting an SIP only for the last four months did not make much sense.
If you want to have a disciplined approach, opt for SIPs from April 2010 onwards.
Like all equity schemes, these schemes come with both growth and dividend options. In case, one opts for the growth option, he/she will not get any returns till the time he/she is holding the investment. But returns at the end of three years will get the benefit of compounding along with being tax-free because there aren’t any long-term capital gains tax on equities after one year.
Anil Rego, chief executive officer, Right Horizons, said, “In case of growth option, the investor gets the advantage of compounding.”
Of course, there is a risk element when one invests in equities. However, over long term (three-five years), returns are more likely to beat the inflation unlike some of the other tax-saving schemes.The dividend option makes sense for people who are close to retirement or have retired because it allows them to get some profits every year.
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