Tax planning is an important and integral component of financial planning. Section 80C falling under the Income Tax Act, 1961 offers tax benefits if you invest in certain investment products.
Some of the investments include Public Provident Fund (PPF), National Pension System (NPS), insurance plans, Equity-Linked Savings Schemes (ELSS), tax-saving fixed deposits (FDs), and more. A total amount of INR 1.5 lakh per annum is available as the tax exemption under this section.
Equity-Linked Savings schemes
ELSS funds are one of the most popular investments to claim tax benefits as per section 80C. As the financial year ends, you may need to invest your money to reduce your tax liability.
Features of ELSS
- ELSS schemes are diversified mutual funds where a large component of the corpus is invested in equities and related products
- Because the corpus is invested in equities, the returns on such funds are not fixed and depend on the market performance
- When you invest in these schemes, you have to remain invested for at least three years
- ELSS investments may be done through Systematic Investment Plans (SIPs)
- Every SIP investment is considered as a fresh installment and must adhere to the three-year lock-in period
- ELSS funds provide dividend and growth options; maturity amount is paid as a lump sum at the time of exit after the lock-in period if you invest in mutual fund growth option; dividends are regularly paid in case of the former option
- Maturity proceeds and dividend incomes earned on ELSS plans are tax-free
How to choose ELSS plans?
Most of the asset management companies (AMCs) offer ELSS plans. It is recommended that you conduct an in-depth research before you make an investment decision. You must evaluate the long-term performance of the various funds before making an investment decision. Additionally, you must understand the investment philosophies, portfolio, and the expense ratio of the funds to make an informed decision.
Benefits over other tax-saving options
- In comparison to other investments such as PPF, NPS, NSC, and FDs, ELSS has the shortest lock-in period of three years
- Because the ELSS funds’ corpus is invested in equities, these have an opportunity to earn higher returns when compared to most other fixed-income securities
- With an SIP, you are able to inculcate investment discipline through regular savings
- If you choose the dividend option, you may earn a regular income through dividend payouts
If you are unwilling to assume higher risks to earn greater returns, ELSS funds may not be the right investment choice. These funds are subject to the risks faced by the stock markets. Therefore, you must understand your risk appetite to determine if ELSS plans are the right choice for you or not.