To invest, you must have money in hand. To have money in hand, you must save. To save, you must have a sizeable income and saving is not everyone’s cup of tea. Saving is easier said than done. Saving for the sake of it might not motivate you set, short and long term goals. Having financial goals would compel you to save.
Once you have money in hand, the next thing to worry about is where to invest? With a wide range of options available, people find it difficult to identify the right investment option.
Investing in schemes covered under Section 80C of the Income Tax Act, offers tax deductions of up to Rs 1,50,000 a year. This covers various investment schemes like EPF, PPF, Tax Saving FDs, ELSS, NSC and so on.
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Equity Linked Savings Scheme, ELSS, is a type of mutual fund, specifically designed to save taxes under Section 80C of the Income Tax Act. Investing in ELSS offers tax deduction of up to Rs 1,50,000 a year. ELSS offers twin benefits of capital appreciation and tax deduction.
ELSS invests mostly in stocks. ELSS has statutory lock-in period of 3 years. The returns earned on ELSS if held for over a year, are subject to long term capital gains tax at 10%.
i) Growth option
Under growth option, the holder would not receive benefits in the form of dividends. These are reinvested in the scheme. This helps in capital appreciation. The catch is that these returns are subject to market conditions which may or may not go in the favor of investors.
ii) Dividend Option
Under the dividend option, holders would receive periodic dividend payouts. Dividends are fully tax exempt in the hands of the investors.
iii) Dividend Reinvestment Option
Under this option, investors can reinvest the dividends received. This is a good option when the market is performing well and is likely to continue this way.
SEE ALSO: How Mutual Funds Invest Your Money?
There are mutual fund houses offering retirement funds meant for building a corpus for retirement and also enjoy tax benefits under Section 80C of the Income Tax Act. The catch is these funds have a lock-in period of 5 years or till the retirement age of the investor, whichever is earlier.
As an investor, you can achieve twin goals of retirement planning and tax savings with retirement funds. A point to note here is that investors must check if a particular fund offers tax benefits as not all retirement funds offer tax benefits.
Investing in ELSS is one of the best tax saving investment options around. You must carefully understand terms and conditions. Remember that you are not allowed to withdraw from ELSS up to three years. You cannot rely on this for meeting emergency expenses. Don’t rush to invest in ELSS at the fag end of the financial year just to save tax. You can also invest in ELSS through SIP.
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