ELSS is best tax planning tool

ELSS is best tax planning tool for one with risk appetite. With the end of the financial year round the corner, planning is occupying top of our minds. One suddenly realizes that investments are not yet made to claim tax deduction or rebates and wondering where to put money in. Looking for great returns? Take a look at tax planning schemes or equity linked tax saving schemes (ELSS) from mutual funds.

Investments in ELSS qualify for tax deduction under section 80 C of the Income Tax Act. However, these products are meant only for people with higher risk appetite as investor’s money is invested in stocks. ELSS schemes mainly invest around 80% of the corpus in equity and equity-related schemes and the rest on debt and liquid fund. They are similar to diversified equity scheme, except for the difference that they have a minimum lock-in period of three years.

On the safety front, usual investment avenues like public provident fund may score over ELSS. But on the return front, ELSS can beat all other investment tools in the section 80 C pool. PPF offers return of 8% where as there is a potential to earn double digit (even triple digit) returns. This is because equity beats all other forms of investments in the long run. For proof, tax planning schemes have seen an average return of around 60% in the last one year. Also investors must not over look the fact that ELSS has the least lock in period. PPF account has 15-year lock-in, whereas ELSS has only three year lock-in period. However, with most of the ELSS schemes performing well these days, it has because very difficult for common investors to choose from. A small advice: don’t fall for flashy performance in the short term. Always opt for a consistent performer over a period of at least five years.

For example, Taurus Libra Tax shield which has given the maximum return of 111.54% in the last one year, has a very risk attached to it. Principal Tax Savings and Birla Sun Life Tax Relief ’96 have given return of around 70-80% with average risk. On the other, seasonal performers like Magnum Tax gain, HDFC Tax saver among others have been a return of around 41% and 60% respectively in the same period with lower risk. Now, depending on ones risk appetite, he or she can make the choice of investment.

ELSS are special equity schemes launched by mutual funds that offer tax benefits for investment up to Rs 1 lakh under Section 80C of the income Tax Act, 1961. Investors must lock their money for three years in ELSS funds to take advantage of the tax benefits. In all other respects portfolio construction, sectoral allocation, scrip selection, and so on an ELSS is similar to a diversified equity find. So an ELSS is essentially a diversified equity fund in which you can invest up to Rs 1 lakh in any financial year, with a lock-in period of three years, to enjoy tax benefits.

The risk element in ELSS is much higher, because the risk of losing hard-earned capital if the market goes into a bear phase.
ELSS compare well with other tax-saving instruments like National Savings Certificates (NSC) or the Public Provident Fund (PPF). Most tax saving instruments offer a fixed rate of return around 8% which is comparable to bank fixed deposits but they offer little in terms of growing capital, and they barely beat inflation, which has been hovering around 5%. ELSS on the other hand, offers the investor an advantage of capital growth over long term thus offering better returns.