Equity linked savings schemes popularly known as ELSS are a type of equity diversified mutual funds. What's special about ELSS is it helps you save tax. ELSS invests most of your money in stocks. ELSS is soon becoming a favorite among the young working citizens of India. The youth of India are using ELSS to save tax. What's special about ELSS is you not only save tax, you also grow your wealth.
ELSS has a compulsory 3-year lock in period, which is much lower than PPF's 15 year lock in or tax saver FD's 5 year lock in. You get a tax deduction up to INR 1.5 Lakhs a year, under Section 80C of the income tax act if you invest in ELSS. Your money may grow during the tenure of the investment and this is not taxed. The money you withdraw at maturity after 3 years, is not taxed.
ELSS will save you taxes and may you rich. Want to know more about ELSS? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.
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Tax benefits enhance ELSS returns:
So how does ELSS save tax and make you wealthy? Let's take a simple example. Let's say you fall in the 30% tax bracket. You invest in an ELSS which has an NAV of INR 20. You want to invest INR 1,50,000 in this ELSS to get Section 80C benefits. You will get 7500 units of the ELSS Scheme.
You fall in the highest tax bracket and you get an exemption of 30% on your investment. So, if you invest INR 1,50,000 in the ELSS, you will get a tax rebate of INR 45,000. Your effective investment in the ELSS is INR 1,05,000. (INR 1,50,000 - Tax benefit of INR 45,000).
Let's assume that after 3 years the NAV has appreciated to INR 40. So the value of your investment has doubled from INR 1,50,000 to INR 3,00,000 in just 3 years. Now comes the good part. You have got a rebate of INR 45,000 because of Section 80C deductions. So, INR 1,05,000 has grown to INR 3,00,000 in 3 years. Your money has gone up from around INR 1 Lakh to 3 Lakhs. Your money has not doubled. It has tripled. So why have you got such high returns? You can thank the tax benefits of your ELSS investment.
1. Why ELSS generally outperforms equity diversified mutual funds?
ELSS is also a type of equity diversified mutual fund, only it has a compulsory lock-in of 3 years. If you invest in ELSS you can't touch your money for 3 years. You are forced to follow a disciplined approach. Staying invested in equity for the long term gives good returns and ELSS makes sure you stay invested for the long term.
If you invest in ELSS, it's good for the fund manager. He gets the space to make long term investment decisions. He doesn't have to worry about liquidity, because you cannot redeem your investment until the 3 years have passed. If the fund manager follows a long term outlook, the ELSS gives better returns.
SEE ALSO: How ELSS benefits from demonetization?
The youth of India love to save tax by investing in ELSS. You and other youth might rush to invest in ELSS during the last quarter of the year. This would mean a lump sum investment. A better approach would be to invest in ELSS via SIP. Systematic investment plan also known as SIP, is a method of investing in mutual funds. It is not an investment by itself. You invest a certain pre-determined amount, (amount you have decided beforehand), at regular intervals of time, in the ELSS. This might be once each week, once each month or once in a quarter.
This approach has two benefits:
ELSS has the power of EEE. ELSS enjoys the Exempt, Exempt, Exempt (EEE) status. The money you invest enjoys Section 80C deductions up to INR 1.5 Lakhs a year, the dividends you receive are tax free and there in no capital gains tax at the time of redemption. ELSS gives you the triple combination, very good returns, risk which you can control/bear and tax benefits. Be Wise, Get Rich.
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