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How ELSS Benefits From Demonetization?

Mr. C.S. Sudheer | Posted On Tuesday, December 13,2016, 06:47 PM

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How ELSS Benefits From Demonetization?



More than a month has passed since the Government scrapped 500 and 1000 rupee notes in the economy. The aim of this move? Break the back of corruption and terrorism in India, fueled by black money in the economy. The total value of 500 and 1000 rupee notes in our economy? A whopping 86%... Now, as new 500 and 2000 rupee notes replace these old notes, this is a golden opportunity for cashless methods of payment. UPI (unified payments interface)…mobile wallets….USSD….(unstructured supplementary service data)…debit card…credit card…Yes, cashless is really taking off, after 500 and 1000 rupee notes have been scrapped.

There is another reason why the Government wants to chase black money. The honorable Finance Minister, Arun Jaitley says, Just 4-4.5 crore people file income tax returns, out of 125 crore people in India.  The Government wants to tax these evaders and fill up its coffers. Tax evaders are stuck…They will be forced to disclose all their black money and pay tax on it. This is an excellent time for tax saving instruments like equity linked savings scheme, popularly known as ELSS. So how does ELSS gain from demonetization? Let’s find out.

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What is ELSS?

ELSS is nothing but a type of mutual fund. However, it’s different from other mutual funds. Unlike other mutual funds, ELSS can save you tax. ELSS invests 65% of your money in equity related instruments (stocks and equity mutual funds). You get a tax deduction up to INR 1.5 Lakhs a year, under Section 80C of the income tax act, on the money you invest in the ELSS. Your money invested in ELSS, is locked for 3 years. (You cannot touch this money for 3 years).


ELSS invests your money in the stock markets. Stock markets are known to give good returns, if you stay invested for the long term. Ideally stocks give good returns, if you stay invested for 3 to 5 years.ELSS locks your money for 3 years. You cannot touch this money for 3 years, which forces you to stay invested in equity (stocks + equity mutual funds). This is good for you, as over the long term (3 years or more), equity does well.

You could invest your money in fixed deposits…but…fixed deposits currently offer an interest rate of just 6.75-7.25% a year. The interest on FD is taxed, which reduces your returns. Then there are the small saving schemes like PPF, NSC, Postal saving schemes and so on. These schemes offer interest around 7.8% to 8.5% a year. A good ELSS Scheme could give you much higher returns.

ELSS enjoys EEE benefits, unlike most other tax saving instruments. You get tax deduction, up to INR 1.5 Lakhs a year, on the money you invest in the ELSS. The money you invest grows and this is not taxed. The money you withdraw at maturity (after 3 years), is tax free.

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How does demonetization help ELSS?

You like hiding old 500 and 1000 rupee notes under your mattress without paying income taxes? What happens…One day the Government scraps 500 and 1000 rupee notes and you are stuck. Depositing black money in banks does not change it to white. You have to pay tax on it. The Government has come up with a scheme called Pradhan Mantri Garib Kalyan Yojana 2016.

You declare your black money and pay a tax + penalty + surcharge = 50% of the amount deposited.

Then…a 4 year lock-in for 25% of the undisclosed income.

Yes…your only option is to deposit black money in banks and make use of this scheme. But…would it not have been great, if you invested your money in ELSS and enjoyed twin benefits.

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Tax saving + Your money grows

You can also invest regularly in an ELSS through SIP. Systematic Investment Plan also popularly known as SIP, is a very smart and hassle free way, to invest in ELSS.  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. You can easily invest small sums of money in an ELSS.

There is no way you can evade taxes…The days of hiding black money in mattresses and walls are over. Invest your money in the ELSS and not only will your money grow, you also save tax…The legal way.

Be Wise, Get Rich.

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