What is Equity Linked Savings Scheme (ELSS)
What is Equity Linked Savings Scheme (ELSS)
We are in the start of a new financial year. This is the right time to plan for the tax savings options for the financial year 2015-16. We know the common names like Life insurance premium, PPF, Employees PF that can help you save tax under Section 80C. But the less popular one is ELSS – Equity Linked Savings Scheme.
What is ELSS?
We have heard about the different types of mutual funds in the market. They are mainly classified as Equity Funds, Debt Funds and Balanced Funds. Within equity funds, a category of fund with certain additional conditions like lock in period, income tax benefits etc. is known as ELSS or equity linked savings scheme.
What are the conditions in ELSS?
The ELSS is coming with a 3 year lock in period – you cannot sell the units within 3 years from the date of investment. If you are opting for an SIP in ELSS, then each SIP installment will have the mandatory 3 year lock in period.
Tax benefits in ELSS
The amount invested up to a maximum of 1.5 Lakh in a year will qualify for tax deduction under Section 80C along with other instruments like Life insurance premium, PPF, etc.
Since it is equity linked mutual fund, there will not be any tax implication on the long term capital gain when you are selling the units after the 3 year mandatory lock in period. So, the sale proceeds after 3 years will be totally tax free in your hands. You get tax deduction on investing and the sale proceeds after 3 years is tax free. If you are opting for the dividend option, any dividend received from ELSS is also tax free.
Which option to choose while investing in ELSS?
1. Growth Option – In growth option income earned by the fund is not distributed to investors. Any income earned by the fund increases the NAV of the units. Whenever the investor sells his units, he will realize long term capital gain. He will not get any dividend in this option.
2. Dividend option – In the dividend option the fund distributes income earned by the fund to the investors as periodic dividends. The date of dividend distribution and the rate of dividend etc. will be decided and declared by the fund. The dividend received by the investor is tax free in the hands of investors. But after the pay out of dividend, the NAV of the unit reduces by the same amount of dividend. In effect, the investor is not getting anything extra from mutual fund dividends.
Advantages of ELSS over traditional tax savings instruments
PPF is the most popular tax savings instrument issued by the Government of India. Public provident fund (PPF) has a lock in period of 15 years. But ELSS has a lock in period of 3 years only. PPF is a debt instrument with rate of return of 8% to 9% which is now linked to the government bond yield in the country.
The return in ELSS varies depending upon the market conditions. Past experience however shows an average return of 12 -15% over a long period of time.
But remember that ELSS performance can be volatile in the short term, being an equity investment. Invest in it only, if your investment duration is long term.
Best tax saving ELSS funds for 2015-2016
Given below are 5 the best tax saving ELSS for 2015-16.
1. Canara Robeco Equity Tax Saver
This fund is having a track record of more than 20 years and is a consistent performer.
2.Franklin India Tax Shield
This fund is in existence for the last 15 years and is a good performer.
3.ICICI Prudential Tax Plan
This is a value fund from the ICICI fund house with almost 15 years track record of good performance.
4.Axis Long Term Equity Fund
Though the fund is having only 4-5 years track record, it is worth investing due to its stellar performance.
5.BNP Paribas Tax Advantage plan
This 8 year old fund is also a star fund in the ELSS category.
Points to note before investing in ELSS
Though the mandatory lock in period is 3 years, just like any other equity mutual fund, you can expect decent returns only if you have an investment horizon of at least 7 years. Investing through SIP covering the 12 month period will be better to benefit from the rupee cost averaging. Opting for growth option will help you in capital accumulation.
So, plan your tax savings for this year through an SIP in ELSS from April itself.
Melvin Joseph
SEBI registered Investment Adviser
SEBI registration number -INA 000000342
Finvin Financial Planners
10. Ground Floor, Olive Excel CHS Ltd
Plot No- 16, Sector 42, Nerul, Navi Mumbai – 400 706
Mobile: 91 9820843739
Website : http://www.finvin.in
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