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The financial year has already begun and it is always advisable to plan the tax saving in advance. According to Sebi guidelines and income tax rules an ELSS or Equity Linked Saving Scheme has to invest a minimum of 80% of total assets in equity and equity related instruments. ELSS has a lock in of three years. However, in case of death of the taxpayer the nominee or legal heir can withdraw the investment any time after one year from the date of allotment of the units. 

ELSS is an equity product which is very volatile in the short term but has the potential to give better returns in the longer term. Though the ELSS has a lock-in period of three years but it may happen that the equity market may not do well during this period and you may have to remain invested in your ELSS investments even beyond three years. 

So ideally a person with minimum of seven years of time horizon should invest in ELSS. This is better suited for a person who is young and has longer period available with him to reach his financial goals. I do not mean to say that you will not get returns in ELSS in three years’ period but there is a probability of your investment in this product not doing good during the period. So go for ELSS if you do not need the money for next seven years. 

How ELSS is different from other equity mutual funds 

The major difference between an ELSS and other equity schemes is that ELSS is eligible for tax benefit under Section 80C but other equity mutual fund schemes are not so eligible. Moreover, ELSS has a lock-in of three years but other equity schemes do not have any lock in but you may have to pay an exit load if you redeem your investments before one year.

ELSS has to invest minimum of 80% of its corpus in equity and equity products as compared to other equity oriented schemes where generally 65% is required to be invested in equity. 

Advantages of investing in ELSS 

The following are the broad advantage of investing in ELSS

-ELSS provides you the ease of making investments by automating it through Systematic Investments Plans (SIP) or STP (Systematic Transfer Plan. Looking at the volatility associated with equity products, you should not invest lump sum in ELSS but should do it in staggered manner through SIP or STP. You should spread the investment required to be made for availing the tax benefits under Section 80C over 12 months. For the current year, you can plan it from this month itself.

-You existing investments in ELSS which has completed its lock-in period can help you avail the tax benefit under Section 80 C just by recycling it. What you have to do is to redeem your existing investments in ELSS and make fresh investments in the same scheme and thus avail the tax benefit without having to invest any money. Please note this strategy involves some nominal cost in the terms of stamp duty and Securities Transaction Tax (STT). In case your long term capital gains on listed shares and equity oriented scheme along with ELSS does not exceed 1 lakh during the year, you do not have to pay any tax.

-ELSS is the only tax saving product which has a short duration of three years except Tier II of NPS account which is available only to central government employees only. All the other products eligible for deduction under Section 80 C have minimum lock in of five years.

-One can invest as small an amount as Rs. 500 in ELSS at a time.

Tax provision applicable for ELSS

For investments made in ELSS, an individual and an HUF can claim deduction under Section 80C up to Rs. 1.50 lakh every year along with other eligible items like PPF, PF, school Fee, Life Insurance Premium, Home loan repayment etc.

Since ELSS has lock-in of three years the profits at the time of redemption will be taxed as long term only which are tax free up to Rs. 1 lakh every year and beyond which it is taxed at flat rate of 10%.  For the purpose of taxation each instalment of SIP and STP in ELSS has to be treated as separate investment.

Since no tax is payable on first 1 lakh of long term capital gains on all equity products, one should book minimum of 1 lakh profits every year to minimize incidence of tax on your equity investments. 

How does ELSS offer wealth creation benefits along with tax saving?

Historically ELSS as a category  has given an annualised return of 16.07% in the last ten years which is quite a long period to assess efficacy of any volatile  investment product. Such huge returns make ELSS a promising investment for tax payers. If one invests Rs. 1.50 lakh every year during 35 years of his active career, he will have 1.71 Crores of corpus accumulated at the time of his retirement based on the historical return of 16.07%.

Balwant Jain is a tax and investment expert and can be reached on and @jainbalwant on Twitter




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